3 Basic Home Loan Types

Buyers who are looking for a home mortgage have fewer options today than in the past. Before the Great Recession, many lenders approved loans based on risky terms. Now, most buyers have three safe and sensible options: fixed interest mortgage, adjustable rate mortgage or interest-only loan.

1. Fixed interest mortgage – This type of home loan has an interest rate that does not fluctuate during the fixed loan period. It allows the borrower to predict future mortgage payments with accuracy. The lender bases a fixed interest loan on the average discount rate over a fixed time period.

2. Adjustable rate mortgage – An adjustable rate mortgage (ARM) has an interest rate that changes every year. Some lenders offer a hybrid ARM, which also includes aspects of a fixed interest loan. For example, they may offer a fixed interest rate for 10 years, then amortize the balance of the loan with an adjustable rate.

3. Interest-only loan – An interest-only loan allows the borrower to pay only the interest on the loan for a set period of time; the principal balance remains unchanged. When the loan resets, payments can increase significantly.

In addition to the basic home loan types, some lenders offer government insured loans. A Veterans Affairs (VA) loan and Home Affordable Refinance Program (HARP) loan are two examples. Home buyers must meet certain criteria to qualify for these loans. No matter how they get into their next home, they should do their homework first to make sure they understand everything about the loan.


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