Types of Mortgages

By Anita Johnston,
LendersMark.org Staff Writer

The finance market has a number of options for borrowers as far as mortgages are concerned. Each option can be adjusted and readjusted in a number of ways to suit the individual needs of a borrower. That presents a really long list of mortgage choices.Here, we briefly discuss a few types of mortgages that are available to you.

Fixed Rate Mortgages (FRM) - Mortgages originally started off with fixed rate mortgage in which the interest rate remains fixed throughout the life of the mortgage

The borrower pays the same rate of interest on thse last month of the loan term that he pays on the first month as well as the months in between. Nearly 75% of the mortgages are fixed rate mortgages.

The benefit of a fixed rate mortgage is that even if there is an increase in the bank rate the interest rate for the mortgage does not increase. Similarly, there is a disadvantage also. If the bank rate falls, the borrower is still charged the fixed rate of interest thereby denying him any benefit of the decrease in the interest rate.

Adjustable Rate Mortgage (ARM) - Adjustable rate mortgage is the type of mortgage where the interest rate charged varies according to the variation in the bank rate. In ARMs, there is an initial period where the interest rate is fixed and after that, the interest rate varies according to the bank rate. The lenders charge 1-2% higher than the bank rate.

Option (Flexible Payment ARM) - This type of mortgage is characterized by an interest rate that adjusts monthly without any adjustment caps. The initial monthly payments are very low, which rise dramatically later on.

Balloon Mortgage - Balloon mortgage is a 30 year fixed rate mortgage that requires a large final payment (large like a balloon) to be paid usually at the end of 5, 7 or 10 years. If a borrower expects a large sum of money by way of bonus or retirement benefits to clear off the large balance of payment, this method of mortgage can be chosen. In the event of failure to pay the balloon amount, the mortgage may be converted in to conventional fixed rate mortgage.

Biweekly and Weekly Payment Mortgage - These types of mortgages reduce the term of the loan and save money. Payment is made every two weeks in biweekly mortgages.

Bimonthly Mortgages - Payment made twice every month, this type mortgage only reduces the payment of a 30-year fixed mortgage to 29 years and 11 months. It saves very little.

FHA Mortgage - Strictly speaking, this is not a form of mortgage but only an additional feature in a mortgage where the lender is assured of payment in case the borrower defaults.

VA Mortgage Loans - Like FHA, VA insures lenders against borrower’s (war veterans) default.

Shared Appreciation Mortgages - The City of Burbank offers a 30-year second mortgage loan with zero interest and payments for the first five years and for the rest 25 years a payment at 5% interest. In exchange, City of Burbank charges a share of the appreciated value when the house is sold.

Interest-Only Mortgage Loan - Interest only mortgage means only interest is paid in the first few years of the mortgage without reducing the principal. This may sound attractive but it is really costly for the borrower over the long run.

For example if a mortgage has interest only period of five years in a 30 year term mortgage, after five years of paying interest alone the borrower has to pay principal and interest for the remaining 25 years. The amount saved by not paying the principal for the first five years is far lesser than the extra amount the borrower pays for the 25 years.