Types of Mortgage Loans

With so many types of mortgage loans available, the process of choosing which is best for you can often be confusing. DMD Chicago Realty makes understanding home loans easy with this simple guide to the most common types of mortgage loans. If you still have questions about your home loan, contact DMD Chicago Realty for more mortgage help and expert advice.

The Major Types of Mortgage Loans

Fixed-Rate Mortgages (30-year or 15-Year)

These are the most common types of home loans. They are preferred by most home-owners because of the security and stability that they offer. Your monthly payments never change, and they are calculated to pay off the loan in its entirety by the end of the loan term, so there is no large payment at the end. The most attractive aspect these loans is the fact that the interest rate is locked in for the life of the loan and can never change.

Adjustable-Rate Mortgages or ARM’s (3-year, 5-year, 7-year)

Adjustable-rate Mortgages are 30 or 15 year term loans that offer an introductory period of 3 to 7 years when the interest rate is fixed at a low rate, but after which time the rate becomes adjustable. They are very popular home loans because they offer better interest rates; sometimes even below the prime interest rate. Because of this they are preferred during times of high interest rates and by people with less than ideal credit ratings at the time the loan is made. The downside to an ARM is that after the introductory period ends, the interest rate can increase, sometime drastically. This can be a very difficult situation because even a slight increase in the interest rate can mean a huge increase in the monthly payment.

Short Term “Balloon” Loans

Short-term “Balloon” mortgages are fixed-rate loans with monthly payments either equal to or smaller than on a 30-year loan (interest only payments are possible), but the balance is due in one lump sum when the loan term expires after only seven to ten years. They are referred to as “reset” mortgages because people will get a very short term mortgage with a fixed rate of interest, then they will either sell or refinance before the period of their loan expires. These loans can be attractive when interest rates are high or you are expecting to sell the property after a short period of time.

FHA and VA - Federally Backed Mortgages

FHA loans are federally-secured loans offered through the Federal Housing Administration. They are offered through most large national banks in every state. These loans can be fixed-rate or adjustable-rate and at varying term lengths. They offer competitive interest rates and down payment as low as 3.5% of the value of the home, or even 0% for veterans of the armed services.

One possible drawback to the FHA loan is that the size of the loan is limited based on the county in which the property is located.

However, one distinct advantage of an FHA loan is that very low interest rates are possible despite small down payments and less than perfect credit because the loans are insured by private mortgage insurance (PMI), which must be payed until 20% of the principal of the loan has been repaid.

Second Mortgages

Anyone who has built up a significant amount of equity in their home can apply for a second mortgage. This loan is a loan against the part of the home that has already been paid off. However, since the second mortgage is subordinate to the first mortgage, it will have a higher interest rate because of the increased risk to the lender.