There are many types of financing options available to homebuyers. Here is a brief overview of the most common types:
Fixed Rate Mortgage (FRM)
The interest rate on a fixed rate mortgage stays the same throughout the term of the loan, usually 15 or 30 years. This means the principal interest portion of your payment remains the same. Payments are stable but initial rates tend to be higher than adjustable rate loans and often cannot be assumed by a subsequent buyer. Fixed rate mortgages can keep you protected from rising mortgage rates.
A balloon mortgage is a loan that must be paid off after a certain period, generally after 5-7 years. The advantage they offer is an interest rate that is lower than a mortgage that is made for a longer term. They sometimes are compared to adjustable rate mortgages because after the period the full remainder of the balance is due or the rates re-adjust. Balloon mortgages are usually used in commercial real estate as opposed to residential. There can be re-financing risks with this loan because it was set up to benefit someone that sells or re-finances the property before the loan matures.
Adjustable Rate Mortgage (ARM)
ARM's are generally 25-30 year loans that are amortized over the life of the loan. ARM's have rates that are usually fixed for the first few (usually 3, 5 or 7) years then the interest rate adjusts up or down depending on the financial markets, such as the Treasury security or a cost of funds. After the fixed-rate period ends, the interest rate can adjust monthly, annually or every few years depending on the loan. Your monthly payments can vary up or down over the life of the loan. Some ARM's have a cap on the interest rate increase, to protect the borrower.
Federal Housing Administration (FHA) Loan
FHA does not lend money or make a loan, rather, it insures loans. The down payment can be as low as 2.25%. Either buyer or seller may pay discount points. FHA charges a 2.25% up front Mortgage Insurance Premium (or as little as 2% for a first time home buyer) that can be financed in the mortgage amount or paid in cash (no premium is required for condominiums). The borrower must also pay an annual Mortgage Insurance Premium or 0.5%, which is collected monthly.
Veteran Affairs (VA) Loan
The VA does not lend the money; it guarantees a portion of the loan so that lenders who originate the loan feel comfortable with their risks. Qualified veterans generally don't exceed loans up to $203,000 with no down payment. VA guaranteed loans can be combined with other second mortgages and can be assumable upon qualifying by any future buyer. VA loans in the past have had lower interest rates than other traditional mortgages.
Second Mortgage/Second Deed of Trust/Junior Mortgage or Junior Lien
An additional loan imposed on a property with a first mortgage. Generally has a higher interest rate and shorter term than the "first" mortgage.
Buyer takes over or assumes the mortgage obligation of the seller (with concurrence of the lender). The interest rate doesn't change and is sometimes lower than the current rate. Often the loan fees are less as well.