Types of Mortgage Loans
A mortgage is a loan secured by some sort of real estate – it can be your primary residence or a home you purchase for an investment. Once you get the loan from your lender, you pay it off in installments over a set period of time, usually 15, 20 or 30 years. While lenders write all kinds of loans, including reverse mortgages and those that have “balloon” payments, they can be divided into two basic types:- Fixed Rate. A fixed rate mortgage gets the interest rate at the time the loan is written, so you pay the same amount of money every month for the life of the loan. These types of loans are the most common mortgages written today, and they have the safety of knowing that the payment amounts won’t change. On the other hand, because the interest rate is fixed, even if rates drop, the payments will stay the same unless you refinance the mortgage. Rates for a fixed-rate loan may also run higher than other types of mortgages.
- Adjustable Rate. Also called an ARM, this type of loan starts with a lower interest rate and lower payments for an introductory period of time, but then “adjusts” periodically, usually causing an increase in payments. Adjustable rate loans often have a “cap,” which limits how much the rate can increase during the life of the loan. These mortgages seem best for those who only plan to own the property for a short period of time.