Mortgages come in a number of shapes and sizes – kind of like drapery. Finding the right one for you depends on many factors, including your personal tolerance for risk, how long you expect to stay in your home, your credit history and more.
Here are 11 mortgages you’re likely to encounter en route to home ownership.
1. Conventional Fixed Rate Mortgage
What is it? This is a low risk mortgage taken on for ten-to-forty-year terms. The interest rate will remain the same for the life of the loan, as will payments.
Potential drawbacks: This type of mortgage requires a significant down payment.
2. Adjustable Rate Mortgage (ARM)
What is it? The interest rate on this mortgage will start lower, but go up and down based on annual adjustments.
Potential drawbacks: It’s a higher risk loan prone to interest rate fluctuations.
3. Hybrid-Adjustable Mortgage
What is it? The initial interest rate is often lower on this mortgage, too. It’s taken out for a fixed term (from 1-10 years) then converts to a 1-year adjustable rate or a fixed rate mortgage.
Potential drawbacks: Like the ARM, it’s a higher risk loan prone to interest rate fluctuations.
4. Federal Housing Administration (FHA), Veterans Administration (VA) or Bond-Backed Mortgages
What are they? These kinds of mortgages appeal to first-time homebuyers because they allow for more liberal qualifying ratios and lower down payments. Payments remain the same throughout the entire life of the mortgage.
Potential drawbacks: Typically, these carry higher insurance costs.
5. Jumbo Loans
What are they? These apply to loans over $417,000 or $729,750 in high-cost areas.
Potential drawbacks: It’s a mighty big loan, which therefore increases a lender’s risk. As such, the interest rates on these tend to be high.
6. Graduated Payment Mortgage
What is it? A medium risk mortgage with a fixed interest rate. Initial monthly payments are low and increase over five-to-ten years before leveling off for the remainder of the term (typically 30 years).
Potential drawbacks: Because payments start out low, it could take longer for payments to make any real dent in the principle.
7. Growing Equity Mortgage
What is it? Like the Graduated Payment Mortgage, this is a medium risk mortgage that starts out with low monthly payments. Excess payments are applied to the principle.
Potential drawbacks: Although payments are initially low, they willincrease over the course of five-to-ten years.
8. Balloon Mortgage
What is it? It’s a short-term mortgage (3-10 years) with a low interest rate, but a high level of risk.
Potential drawbacks: That depends on your cash flow; it requires a hefty final payment.
9. Shared Appreciation Mortgage
What is it? Offers a low interest rate and low monthly payments in exchange for a shared appreciation of home value with the lender upon your home’s sale.
Potential drawbacks: If the value of home doesn't increase as expected, the lender may charge you additional interest.
10. Seller-Financed Mortgage
What is it? With this mortgage, the seller acts as the lender. Terms are negotiated between you and him/her.
Potential drawbacks: That depends on how well you and the lender get along.
11. Wraparound Mortgage
What is it? Like the seller-financed mortgage, the seller acts as the lender. The seller accepts a secured promissory note from the buyer for the amount due on the underlying mortgage plus an amount up to the remaining purchase money balance. Terms are up to both of you.
Potential drawbacks: Not only will you be paying off your own loan, you’ll be paying off the remainder of theirs. Your interest rate will be higher on the seller’s mortgage, but probably lower than on a conventional fixed rate mortgage.
Beyond dotted line…
You can obtain your mortgage through your local savings bank, a mortgage specialty company or the federal government via Fannie Mae.
But keep in mind that this is a long-term relationship you’re entering into – both with your house and your lender. Do yourself a favor and put as much thought into it as you do your zip code.