A Variety of Mortgates
As we have covered before, a mortgage is a loan specifically used to buy property. But did you know there are different kinds of mortgages? Perhaps you have heard some of their names thrown around before. Below, we will explain what they all mean.
Fixed-Rate
A fixed-rate mortgage is just that – fixed. The interest you pay does not change the entire duration of the mortgage. This means that no matter the state of the market—whether is bubbles or crashes—you do not have to pay more money. What is the perk of that? As a buyer, you know what to expect. You will simply pay the same amount each month, no matter what.
Adjustable-Rate
Opposite of a fixed-rate mortgage, an adjustable mortgage changes. Depending on the rates in the current market, the interest you pay changes. The upside here is that when the market is in your favor, your interest rates go down. That means you pay less money. However, there is a flipside. If the market is not in your favor, you would end up spending more money.
An adjustable-rate mortgage may be scary, but there are two parameters put into place. The first is something called “the period of adjustment.” Similar to how it sounds, this is what decides how much your interest rate is able to change from different periods. The second parameter is there to determine how much the interest rate can change during the entirety of the loan.
Two Step
The first two types of mortgages we discussed are on either extreme of the spectrum. There are, however, different kinds of mortgages in between. The two-step mortgage is a hybrid of the previous two. It is, essentially, when different periods of the mortgage switch between fixed-rate or adjustable-rate.
It is worth noting that the first phase of the mortgage is a fixed rate. The benefit here is that this rate is typically offered with lower interest than a traditional fixed-rate mortgage. However, the next phase of the mortgage must be an adjustable rate, and the buyer may not have a market that in their favor.
Conforming/Non-Conforming
There are two mortgage loan companies: Fannie Mae and Freddie Mac. A conforming mortgage is one that follows that guidelines of said lending companies. A non-conforming mortgage is just that – non-conforming to the guidelines. This most commonly occurs when the entirety of the mortgage is greater than the total amount allowed for the loan.
Balloon
A Balloon Payment Mortgage is an uncommon mortgage with some benefits. A Balloon Payment Mortgage can be a 10-year term mortgage that is amortized over 30 years. Amortized means the payments are being distributed over a period of time. In this case, over 30 years. After 10 years, the remaining balance is owed. What is the benefit of this mortgage? Let’s say you only plan to own the house for 10 years. You get the lower interest rate for a 30-year term loan but only have it for 10. If you plan to come into a large sum of money within 10 years and could pay off the remaining balance, this would also be beneficial.
Federal Housing Administration
These are sometimes referred to as federally backed mortgages. This is a great option for low income home buyers. It, essentially, is an option for low-income buyers to buy a home with a lower down payment. This also usually does not require as high of a credit score. Because this is a government-based loan, the qualifications and costs vary from state to state and county to county.
Veterans Administration Loan
This is exclusively for United States veterans. It gives qualifying veterans the opportunity to buy a home without having to give a down payment. This also typically has low closing costs.
Fannie Mae and Freddie Mac
As we mentioned before, there are two loan companies: Fannie Mae and Freddie Mac. Their purpose is to make sure that mortgages are accessible to different types of people. How do they do this? They state by buying mortgages. Then, they package them into securities that are backed by their respective firms. They are then sold to investors. Due to the competition of these two companies, there is a hearty supply of mortgages that are low cost.
