Types Of Mortgage Loans


In United States buying a house requires a huge mortgage. However customers face a tough time in deciding which type of mortgage loan should best suit their requirement. Most of the time borrowers are not much aware of various options available or the details of these mortgage loans. We would be unfolding the most common types of mortgage loans here.

Fixed Rate Mortgage Loan

This is the most common type of mortgage loan in U.S. Borrowers are quite comfortable in repaying the instalments as the interest rate in this case is fixed through out the term up to a certain limit. Financial institutions fix the interest rate in this type of loan at a little higher rate in order to cover their risk for fluctuating increased rate of interest in future. The usual term for this type of loan is 10 to 15 years. However this mortgage loan does not decreases the interest rate in case of low interest rate in market, thus it may be a loosing deal for borrowers at times.

Adjustable Rate Mortgages

Most adjustable loans fall in the category of 25 to 30 year. A fixed rate of interest is paid in the initial years of loan which may be of 5 to 7 years. This rate of interest is lower that the interest rate of fixed rate mortgage loan. Once the initial time period is over the interest rate may vary as per the market fluctuations. This can both be beneficial or risky for the borrower in comparison to fixed rate mortgage loan. Beneficial when the market rate is lower than the fixed rate and risky when market rate rocket shoots in comparison to fixed rate mortgage interest rate.

Government Backed Loans

These loans are insured by the government authorities. The Federal Housing Administration (FHA) guarantees mortgages in order to obtain loan on lower down payment. There is certain amount limit for borrowing but they are sufficient enough for buying a decent home. With the FHA backing, financial institutions are more than willing to grant loan, hence it has helped the common man to a great extent in obtaining a modest house.

Interest Only Loans

These types of loans are best for people with meagre income as they are saved from paying a hefty amount every month as the instalment. Interest only loan is the mortgage loan in which the borrower only has to pay the interest every month for initial years, this saves him a lot of money every month to put it in some other consecutive use. However the rest of amount is paid when asked for or as per convenience. The darker side to this type of loan is that once you start paying the principal amount the monthly instalment proves to be rocket high, and chances are that you may default, owing to the fact that this option was taken because of borrower's low paying capacity per month.

Above are the major types of mortgage loans. Each of them has their own advantages and disadvantages and they tend to satisfy individual requirements. However most common of them are the fixed rate mortgage loan and the Adjustment rate mortgage loans.