Mortgage Types

Fixed rate mortgages are probably the most common type of mortgage. "Fixed rate" refers to the fact that the interest rate is agreed upon at initiation and never changes over the life of the loan. This also means that the principal and interest payment is fixed and will not change.

Adjustable rate mortgages do just that - adjust their rates. Simply put, a loan that starts with an initial rate of 5 percent may be 7 percent the next year and 9 percent the third. Yes, that means that in most cases, your payment changes. When interest rates change, payments are re-calculated on the remaining principal balance for the remaining term at the new interest rate.

A short term fixed mortgage has a set interest rate and set payments based on an amortization of 30 years. However, the loan converts to an adjustable loan after a period of 3, 5, 7 or 10 years depending on which program you decide on. This loan is an attractive option for someone who anticipates selling or refinancing their home during the fixed rate period of the loan. If you don’t move or sell during that period, make sure the loan doesn’t contain a prepayment penalty. That way, you can refinance if and when rates drop.

Conventional loans originated in the 1930s after the Depression and are the benchmark of all other loan types. These loans have several traits:

• Set Monthly Payments: The periodic payment never changes.
• Set Interest Rate: The interest rate never changes.
• Set Loan Term: Standard terms apply
• Self Amortization: The loan is paid off at the end of the specified term.

This type of loan is government-backed and available only to veterans. Some of the features are:

• No down payment required
• Low interest rates

A VA loan has an upfront requirement of a funding fee (FF). This funding fee is a one-time charge which can be rolled into the mortgage amount.

A 3 to 5 percent down payment can qualify you for a better interest rate. However, if you don't meet the requirements for a 3 to 5 percent down loan, you can see if you qualify for a long term fixed rate loan with no money down. These products have a higher interest rate and a prepayment penalty. They are not available from many lenders.