Basic types of loans
While several mortgage? products come with different or unique features, most loans fall under a few standard types. It is important to understand these differences, especially when determining the right mortgage product for your needs since they will affect your current and long-term payments.
A fixed-rate mortgage? offers a consistent interest rate? for the entire life of the loan, which means that your total monthly payment of principal? and interest will remain the same over time. If you plan to stay for a long time in the home you’re buying, or want a consistent mortgage payment amount, a fixed-rate mortgage is usually the way to go. Fixed-rate mortgages are available for various durations—e.g., 10, 15, 20, or 30 years. Loans with longer terms usually have a lower monthly payment, but a higher overall repayment amount, because you’re paying interest on the amount borrowed over a longer period of time.
If you get an adjustable-rate mortgage (ARM)? , the interest rate can change—and most likely will—over the life of your loan. Depending on your loan terms, your interest rate could remain unchanged for the first adjustment date, such as 3, 5, or 7 years. Then it could change as often as every six months throughout the rest of the 30-year period. While an adjustable-rate mortgage may start off with a lower interest rate, it could increase, which can increase your payments. Borrowers may choose to go with an ARM when they don’t plan on staying in a home long term, or if they expect their incomes to increase in the next few years.
An interest-only mortgage has an initial period of time at which your payments only cover the cost of interest, and they don’t go toward the principal amount. Usually, this can mean that your payments are smaller in the beginning, and then at the end of the interest-only period, they increase significantly to include both interest and principal payments. Some may even require a balloon payment? for the entire balance. Interest-only mortgages are less common, and they can add risk because borrowers need to be prepared for the higher payments after the interest-only period ends. In addition, you will not be building any equity? during the interest-only period because you will not be paying down the principal amount you owe.
If you have income restrictions, currently serve in the military, or are a military veteran, the Federal Housing Administration? and Department of Veterans Affairs? offer loans with unique benefits and additional flexibilities around credit and income guidelines that could help you purchase a home. Usually, you will have a lower down payment? and qualifying guidelines that are more flexible. Make sure to let your lender? know if you think you qualify for this loan type.