Types of Mortgages

types of mortgages

There are many types of Mortgages out there, we have listed a couple of the more common ones here.  Contact your mortgage agent, or ask us to help you find the best fit for you.

Fixed-Rate Mortgage

A fixed-rate mortgage is traditionally one of the most popular mortgage types in America. They are typically taken out over a 30-year period, but lengths of 15 to 25 years are also available. The interest rate and monthly mortgage payment on a fixed-rate mortgage remain the same throughout the entire life of the loan. The main advantage of a fixed-rate mortgage is that the borrower knows exactly what their monthly costs will be until the entire mortgage has been completely paid out. The main disadvantage is that the borrower pays a premium for this guarantee in the form of slightly higher interest rates.

Adjustable-Rate Mortgage

With adjustable-rate mortgages the interest rate is linked to current market rates and fluctuates with economic changes. When interest rates go down, so do your mortgage payments. When rates go up, your mortgage payments increase accordingly. ARM interest rates are usually set lower than those found in fixed-rate mortgage, at least at the beginning of the term. This means that a home buyer opting for an ARM will be able to qualify for a larger loan since they are paying less interest. However, because ARM interest rates fluctuate there is a level of uncertainty and risk involved if economic conditions create long-term interest rate increases. ARM interest rates are normally fixed for the first six months to a year, after which they are pegged to some major economic index such as the T-bill rate.

For adjustable-rate mortgages there are two "caps" on interest rate increases. The "period of adjustment" cap determines how much the interest rate is allowed to vary from one period to the next. For example if the agreed upon period is every six months with a period of adjustment cap of 1%, then the maximum interest rate increase over that six-month period could not exceed 1%. The second cap puts a ceiling on how high the interest rate can increase over the life of the loan. For example, the maximum increase might be negotiated to be 6%. This figure should be taken into account as the "worst-case scenario" when considering this type of financing since the interest rate could possibly rise by up to 6% from the initial rate. If you are sure that you could afford these worst-case rates then you might consider this type of mortgage since you would benefit if the rates went down. Another feature, which can sometimes add a level of comfort to this type of mortgage, is a conversion feature. Having a conversion clause in the mortgage gives the home buyer the option to lock in the interest rate at certain times during the term of the mortgage. There is usually a conversion charge associated with this option.

Conforming and Non-Conforming Mortgages

A conforming mortgage refers to a mortgage that is drawn up within the guidelines specified by the lending institutions referred to as Fannie Mae and Freddie Mac. The most common reason for a mortgage to be referred to as non-conforming is because the total amount of the mortgage exceeds the lending limits or total loan amount allowed. This type of non-conforming loan is often referred to as a Jumbo Mortgage.