Mortgage Types

There are many types of mortgages you can choose from. Which type you choose usually depends on the length of time you think you'll be in your home or the other financial obligations you have. If you think you'll be there for the long haul, then you may want a fixed rate mortgage with the lowest interest rate you can get.

photoThere may be other considerations, however. What if you have kids who are going to be entering college in 10 years? In that case, you might consider getting an adjustable rate mortgage, or a mortgage with a balloon payment so you can keep your payments low for the first few years in order to save for college. Once the kids are out of college, you can refinance at the current rate. If you don't think you'll be in your home for that long, then you may also want to look at other options.

The mortgage payment is made up of:
  • Fixed-rate mortgage - This mortgage offers an interest rate that will never change over the entire life of the loan. Traditionally, a fixed rate mortgage is one of the most popular types. They are typically taken out over a 30-year period but there are lengths of 15 to 25 years. The interest rate and monthly mortgage payment on a fixed rate mortgage remain the same on the entire life of the loan. The main advantage of this type of mortgage is that the borrower knows exactly what their monthly costs will be.


  • Adjustable-rate mortgage (ARM) - An adjustable-rate mortgage has an interest rate that changes based on changing market rates and economic trends. They usually offer an initial interest rate that is two to three percentage points lower than fixed-rate mortgages, but they don't offer the stability or assurance of a known mortgage payment in the years to come. If you don't expect to be in your home for many years, however, an ARM may be just what you need. How often your interest rate adjusts is determined by the terms of the loan. You may choose a six-month ARM, a one-year ARM, a two-year ARM, or some other term. There is usually an initial period of time during which the rate won't change. This might be anywhere from six months to several years. There will also be caps, or limits to how high your interest rate can go over the life of the loan and how much it may change with each adjustment. Interim or periodic caps dictate how much the interest rate may rise with each adjustment. The interest rates for ARMs can be tied to one-year U.S. Treasury bills, certificates of deposit (CDs), the London Inter-Bank Offer Rate (LIBOR), or other indexes. When mortgage lenders come up with their rates for Arms, they look at the index and add a margin of two to four percentage points. Being "tied" to these index rates means that when those rates go up, your interest goes up with it. The flip side is that if they go down, your rate also goes down.


  • photoBalloon mortgage - A balloon mortgage offers an initial interest rate that is lower than fixed-rate mortgages. It keeps this low fixed rate for five to seven years and then requires a "balloon" payment. The balloon payment is the final payment of the loan and pays off the entire balance. Monthly payments are low because the payments for those first five to seven years are amortized at a low interest rate over the total length of the loan. If you plan on either selling your home, paying it off, or refinancing it before the balloon payment is due, then this type of mortgage is good deal.


  • Government loans - Government housing loans help lower the costs of mortgages so that more people can afford to own their own home. Here are a few:


    • The Federal Housing Administration (FHA) offers a mortgage financing program that insures home loans. The FHA doesn't make the loans itself; rather, it serves as an insurance policy for lenders. Because the financial requirements for FHA loans are relaxed compared to traditional commercial loans, more people are able to afford to buy homes. FHA insurance makes lenders more willing to work with someone who might not completely fit their usual loan qualification requirements. In order to qualify for this type of loan certain requirements on the property must be met as well as maximum loan amounts. These requirements vary region to region. HABS Real Estate Group and HABS New Homes Group and/or a mortgage specialist can provide you with information for New Hampshire.


    • The Veterans Administration (VA) loans are designed for qualified US veterans for the purchase of a home with no down payment and lowered closing costs.


    • The Fannie Mae and Freddie Mac loans are independent and privately run companies that operate under special congressional charters. These companies compete with each other for mortgage business. This competition is good as it ensures there is an ample supply of low cost mortgage money available to the home buyer



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