Types of Mortgages

A mortgage is a loan obtained to purchase a home. When you take out a mortgage, you agree to repay the loan with interest over a set period of time, typically 15 or 30 years. The home you buy serves as collateral for the loan, which means the lender can repossess it if you default on the loan.

Residential mortgages come in a variety of forms, each with its own set of terms, conditions, and interest rates. We'll look at the most common types of residential mortgages in this article to help you make an informed decision when buying a home.

1) Fixed-Rate Mortgages: The most common type of residential mortgage is a fixed-rate mortgage. The interest rate on this type of mortgage remains constant throughout the loan's term, which is typically 15 or 30 years. This means that your monthly payments will remain the same for the duration of the loan. This type of mortgage is ideal for people who want to budget their monthly expenses because they know exactly how much they'll have to pay each month.

2) Adjustable-Rate Mortgages (ARMs): ARMs are mortgages with variable interest rates that can change over time. The interest rate is typically set by the lender and is based on an index, such as the London Interbank Offered Rate (LIBOR). The interest rate on your loan can change over time, which means your monthly payments will change as well. ARMs are a good option for those who anticipate an increase in their income over time, as the lower initial interest rate can save them money in the short term.

3) FHA Loans: FHA loans are backed by the Federal Housing Administration and are intended for those who may not qualify for a conventional mortgage. FHA loans have lower down payment requirements and more lenient credit standards, making them an appealing option for first-time homebuyers or those with poor credit. FHA loans, on the other hand, require mortgage insurance premiums to be paid for the life of the loan, which can make them more expensive in the long run.

4) VA Loans: Eligible military members, veterans, and surviving spouses can apply for VA loans. The Department of Veterans Affairs backs these loans, which do not require a down payment or mortgage insurance. VA loans also have less stringent credit requirements.

5) Jumbo Loans: Jumbo loans are intended for borrowers buying a high-priced home. These loans are typically larger than the conforming loan limits established by Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy and securitize mortgages. Jumbo loans typically have higher interest rates and stricter credit and income requirements than conventional loans.

To summarize, there are numerous types of residential mortgages available, each with its own set of terms, conditions, benefits, and drawbacks.  To determine which type of mortgage is best for you, consider your financial situation, including your credit score, income, and future plans. Additionally, ask your realtor or lender for help determining the right option for you.