Explanation - Mortgage Types

Finance is almost always at the forefront when it comes to real estate topics. The following explanation of mortgage types will help you understand your options.

A discussion of mortgage types 20 years ago was fairly simple. There were a relatively small number to choose from as the lending industry was a rather uncreative lot. Since that time, however, literally hundreds of different loan types have come on the market. Obviously, we can’t cover them all here, but we can make a good head start.

Any explanation of the different mortgage types has to start with fixed rate mortgages. They are the traditional standard bearers in the mortgage industry. As the name suggests, they come with a fixed interest rate and payment amount throughout the length of the mortgage. This is usually a 30 year term. The advantage of these types of loans is you always know your payment and things remain stable. The downside is the interest rate is usually a bit higher than our next type of loan.

Adjustable rate mortgages are often just called “ARMS”. If you are new to the real estate world, people are discussing these loans, not body parts. As the full name suggests, these mortgages have an adjustable interest rate and, thus, monthly payment. The advantage to these types of loans is they tend to start out lower than a fixed. The disadvantage is they can rise at some point and become more expensive than a fixed rate mortgage. Basically, you are making a bet.

Ah, but what is this I hear about conforming and non-conforming loans you might be asking. Well, these loans can be either fixed or ARMs. The dividing line comes from the amount you borrow, not the type of loan per se. Why is this? Well, the government guarantees conforming loans, which makes them easier to get since the lender is taking less risk. So, where is the dividing line? It depends on where you are in the country. It usually runs in the $200,000 to $400,000 range. These amounts, however, are being readjusted upwards as of the writing of this article.

No explanation of mortgage types would be complete without mentioning subprime loans. What are they? Well, they are mortgages given to people that would not traditionally qualify for them. This could be because they don’t really make enough money or they have poor credit. These loans were given out far too often in the hot real estate market of the early 2000s and we are seeing the negative results now.

What about an explanation of… Yes, there are many loans we’ve not even touched here. They include everything from balloon loans [avoid], bridge loans, no doc loans, stated income, hybrid, and many more. You can try reading through the rest of our mortgage section or speaking with a mortgage professional to learn more.

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