What Are the Various Types of Mortgages?

There are many different types of mortgages, and you should contact several lenders to decide which fits your needs best.

Some of the most common mortgages available today include fixed-rate mortgages and adjustable-rate mortgages.

Fixed-Rate Mortgages - A fixed-rate loan has an interest rate that stays 'fixed' during the term of the loan. This means that your loan payments will stay the same for the whole term of the loan. Fixed-rate loans offer stability in fluctuating market conditions and the comfort of knowing exactly how much your housing payment will be.

Adjustable-Rate Loans - Adjustable-Rate Mortgages (or ARMs) are home mortgages with interest rates that can change periodically. They frequently have an initial interest rate lower than that of a fixed-rate loan. After that initially specified period, the interest rate may be adjusted based on changing market interest rates. Your payment may go up or down with interest rate changes, and your future monthly payments are uncertain. ARM's therefore have risks in periods of rising interest rates, but can also be less costly over the long run if interest rates decline down.

Interest-Only Loans - This is a mortgage in which your payments only cover the interest on the loan balance. The loan balance does not decrease with your payments. Usually the interest-only payments last for a limited period, after which payments increase and the borrower must begin paying on the principal in addition to interest. There is a risk associated with this loan. Recently property values have been decreasing, meaning that if you had this type of loan you ended up owing more money than your home is valued at.

Negative-Amortization Loans - A negative-amortization mortgage is a deferred interest loan allowing the borrower to make payments that are less than the accruing interest. If the borrower chooses to make the these minimum monthly payments, the loan balance will increase over time by the amount of interest you have not paid on the loan. Again, with falling property values this is a risk.