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What are the Different Types of Mortgages?

Ken Black
Ken Black

The choices for a prospective home buyer may seem overwhelming at first, with everyone offering different advice and telling the potential buyer what to consider. Before long, he or she may be confronted with dozens of different choices from different providers, and this is just concerning the types of mortgages. Fortunately, while the wording and packaging may be different, types of mortgages basically fall into two major categories as far as the consumer is concerned: length and rate structure.

The types of mortgages, that fall into the length category are usually either offered as 15-year or 30-year options. While the payment is substantially higher for the 15-year types of mortgages, they are not double the amount of the 30-year mortgage, as some may suspect. These 15-year types of mortgages do not pay nearly as much interest as a longer loan, and therefore the monthly payment does not need to be as much.

Length and rate structure are used to distinguish different types of mortgages.
Length and rate structure are used to distinguish different types of mortgages.

Some say that choosing a 15-year loan is somewhat risky, just in case payments cannot be made on the loan. One possible solution to the risk assumed in these types of mortgages is to take out a 30-year mortgage and pay on it as if it were a 15-year mortgage. That way, if there are any unforeseen financial problems, there is still an option of not paying so much monthly for the home. In almost every case, any amount paid beyond the minimum monthly payment goes to pay down principle, not interest.

Fixed-rate and adjustable mortgages are two common forms used to purchase homes.
Fixed-rate and adjustable mortgages are two common forms used to purchase homes.

The other category for types of mortgages deals with interest rates. The two main choices are variable or fixed, though in some cases there can be a hybrid of the two. A fixed-rate mortgage means the interest rate will be the same as long as you have the loan. Variable-rate mortgages mean that the rate changes periodically.

In some cases, interest rates can be fixed for a period of time, perhaps as long as five to seven years, then change to a variable rate. This rate could fluctuate annually, or even more often, depending on the agreement and the economic conditions. To entice buyers into these types of mortgages, the initial interest rate during the fixed-rate time period is usually very attractive. In some cases, homeowners will refinance to a more traditional loan just before the adjustable rate kicks in.

A 15-year mortgage raises monthly payments, but allows homeowners to pay less interest over the life of the loan.
A 15-year mortgage raises monthly payments, but allows homeowners to pay less interest over the life of the loan.

Another type of mortgage falling outside these main categories are assumable loans, which are becoming less popular. This happens when a seller is still paying a mortgage on the home and the buyer comes and assumes that mortgage and all the conditions that apply to it. Banks only have to agree to this if the mortgage is assumable and if other conditions, such as credit worthiness of the buyer, have been met.

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    • Length and rate structure are used to distinguish different types of mortgages.
      By: nito
      Length and rate structure are used to distinguish different types of mortgages.
    • Fixed-rate and adjustable mortgages are two common forms used to purchase homes.
      By: Brian Jackson
      Fixed-rate and adjustable mortgages are two common forms used to purchase homes.
    • A 15-year mortgage raises monthly payments, but allows homeowners to pay less interest over the life of the loan.
      By: bmak
      A 15-year mortgage raises monthly payments, but allows homeowners to pay less interest over the life of the loan.