Right after the last housing bubble, the types of mortgage loans available for homeowners were significantly streamlined, to make it much easier to understand.

Just as you seek to navigate through the mortgage loans available, your biggest decision would be whether to accept a fixed conventional fixed rate loan, or an adjustable home loan type.

With much congressional over-sight, mortgage bankers are now shying away from exotic home loans, usually referred to as sub-prime lending.

While some might think there are only three main types of mortgages that homeowners can select from, the list expands when you add FHA mortgage loans, VA loans, Balloon mortgages, and Reverse mortgages.

We’ll be examining each of those mortgage loan types in detail.

Here Are The Different Types of Mortgage Loans

✔ Fixed Interest Rate Conventional Mortgage Loans

This is the most popular type of mortgage loan, and at least 75% of all new home loans belong to this group. Most times, the interest on your home loan remains the same, for the entire duration of the mortgage.

The most popular term for fixed rate mortgages is either 15 years or 30 years amortization. Meaning you have equal payments throughout the term of the fixed rate mortgage.

Occasionally, the bank would grant a 10 year mortgage loan to qualifying borrowers with verified substantial income.

You should know that most fixed rate mortgages come with front-loaded interest, which means for the first few years, most of your monthly payment is going towards paying down interest.

In fact, from our calculation during the first 5 years of a 30yr fixed rate home mortgage, your monthly payment is distributed as follows, 75 to 80% towards interest payment, while the rest goes towards the principal.

With this loan type, the average homeowner does not start seeing significant reduction in principal, until after the 15yr.

While the certainty of your mortgage payments is a well known factor why most people choose this type of loan, there are other pros and cons to consider.

Pros

One of the biggest advantage to having a fixed rate interest home loan is the known factor, of what the mortgage payments would be every month of the year.

This makes it much easier for any homeowner to plan and budget accordingly. Since the interest rate on the home mortgage remains static for the entire duration of the term, if you’re the principal owner of the home, you sleep well at night knowing that fact.

It’s also easier to refinance after a few years, if you discover that home loan rates have dropped significantly as compared to what you’re paying.

You get to choose how long you want the home mortgage term for. The most popular are 15, 20, or 30 years amortization schedule.

The shorter terms builds equity much faster, but involves much larger monthly payment outlays.

Cons

Sometimes you might not be able to easily refinance, to take advantage of the prevailing low interest rates.

If you home would not appraise for what you owe on the principal, you’re in essence stuck with the higher rate home mortgage.

Mortgage bankers are more strict with the approval requirements of a fixed rate home loan, as compared to those applying for an adjustable loan mortgage.

If you have less than stellar credit, don’t be surprised if your home loan officer suggest you consider an adjustable rate mortgage to make approval easier.

✔ Adjustable-Rate Mortgage Loans

Adjustable rate mortgages took a significant fall during the last housing bubble, and most new home buyers are shying away from considering this type of mortgage.

Sub-prime lending gave a bad name to adjustable mortgages, and is now less popular among the average real estate buyer.

With an adjustable mortgage home loan, your interest rate is usually fixed for a short period, and then will adjust based on several factors that where clearly spelled out in your mortgage note.

This type of home mortgage is popularly known as ARM, and it’s far riskier to the borrower due to the uncertainty of the monthly payments well into the future.

Mortgage bankers are not limited in how they can structure adjustable mortgage terms, and the average homebuyer must read the mortgage note carefully, before signing on the dotted line.

Here are some examples of ARM Mortgages

5/1 Adjustable Rate Mortgage : Meaning the initial interest rate on your home mortgage is locked-in for 5 years. But you’ll witness adjustment of the home loan rates for the remaining 25 years.

3/1 Adjustable Rate Mortgage: Your home loan rate would not adjust for the first 3 years of the mortgage, but will adjust every year for the next 27 years.

10/1 Adjustable Rate Mortgage: This one used to be very popular, as the interest rate on your mortgage loan would not adjust for the first 10 years. Expect yearly adjustment of the interest rate for the next 20 years.

7/1 Adjustable Rate Mortgage: The rate you pay on your ARM mortgage is set for the first 7 years, but then will fluctuate every year for the next 23 years.

While fixed rate mortgages are easier to understand, your average adjustable rate mortgages comes with more financial jargons that might not make sense to the average home-loan borrower.

Here are some terms that’ll greatly influence how much your rate goes up, during the adjusting periods for your ARM loan.

The Index – this is the well publicized measure that looks at the true cost of money. You home loan will be tied to some index that will be used by the mortgage banker.

While there are many indexes out there, the most commonly used ones are the Libor rate, the London Interbank offered rate, or COFI (the cost of funds index) rate.

Margin – This is simply the predetermined amount that will be added to what was calculated from the index, to help determine what you new mortgage rate will be for that adjustment period.

Cap on Interest rate – Meaning their is a limit to how much change can be made to your interest rate for your ARM mortgage.

The cap is just a way to make consumers rest easier, knowing the rate on the home loan would not rise above a certain percentage for each adjustment period.

Pros

You can start out your home ownership years with much lower payments, as compared to getting a fixed rate mortgage loan.

This type of mortgage loan is ideal for people that only plan to stay in one area for a short amount of time. Gives you the ability to sell the home right before the adjustment period kicks-in.

Since the loan rate is lower during the first few years, one might qualify for a higher mortgage amount due to the low monthly payments.

This might be ideal for someone expecting a significant rise in monthly income, like a medical doctor just graduating from medical school.

Cons

While you’re enjoying the initial low monthly payments, the adjustments in the interest rate of the loan can substantially increase your monthly mortgage payments.

Most ARM notes have terms that favors the mortgage banker. In times of low interest rates, adjustable mortgages are not the best way to go for financing your new home purchase.

You do not want to roll the dice, and tie your financial future to probably paying high mortgage rates on the remainder of your principal.

In this low interest rate climate, a good lawyer would probably discourage you from taking that chance.

✔ FHA Mortgage Loans

This would fall into the fixed rate mortgage criteria, but it has some unique pre-requirements that calls for a direct examination of this mortgage type.

The Federal housing administration is a created government entity, that ensures loans for first time home buyers that would otherwise find it hard to qualify for conventional loan mortgages.

The FHA as the entity is commonly called, is task with increasing homeownership, by insuring mortgages on single family dwellings, including some multi-family homes, and hospitals.

In fact, the housing market would probably collapse overnight, without the assistance of this profit making federal agency.

While FHA does not make any direct loans to homebuyers, the insurance provided is why many loans are granted in the first place.

Home loans can be granted to potential real estate purchasers with as little as 3% down-payment. Even, part of the closing cost is allowed to be financed, as part of the loan amount.

The loan borrower pays an initial premium which is known as points at closing, and the monthly payments also includes premiums for the cost of insuring the mortgage.

The monthly premium requirement if waived, if the buyer puts down at least 20% or more in downpayment funds for the real estate purchase.

Pros

Comes with a standard loan qualification metrics, that’ll allow most first time home buyers to qualify.

You can buy your first home with just 3% down payment, and some of the closing cost can even be added to the mortgage loan amount.

Cons

The biggest disadvantage for this type of mortgage is that your approved loan amount is strictly limited by FHA regulations.

The amount that can be loaned out on that new home purchase is limited based on your geographical location.

The PMI insurance premium added to your monthly payment is an added expense to your mortgage cost.

This can be avoided, if you have at least twenty percent or more to put down towards your real estate purchase.

✔ VA Mortgage loans

This is only for qualifying veterans, and surviving spouse or siblings. This type of mortgage is loaded with red tape that needs to be navigated by the potential homeowner.

The veterans administration does not directly make the loans, but it just insures a percentage of the principal against default.

Even the lenders that participate in this type of home mortgage are under strict guidelines as to what they can charge, or not charge the borrower.

With this loan program, it’s possible for a veteran to qualify for almost total financing, as long as the selling price is within the appraised value of the real estate.

Pros

Very limited or no downpayment requirement, as long as the selling price is within the appraised value of the new home.

You’re not required to maintain private mortgage insurance of any kind, for the mortgage to be approved.

Your closing cost is limited by VA guidelines, thus limiting the ability of your lender to add additional expense to your closing cost

The seller of the home is allowed to pay the buyers entire closing cost.

The loans are allowed to be assumable, just as long as the new buyer is also qualified, under VA guidelines.

Cons

The amount of paperwork is insanely complex, and you’ll first need to get an eligibility approval before you even shop for your real estate loan.

The amount that can be borrowed is limited by some crazy formula, that we found truly confusing.

While the VA loan program is touted in the news media as helping veterans to become homeowners, the truth is that most cannot even qualify under the convoluted VA loan requirements.

Even if you’re a veteran, stay away from this complex type of mortgage, and just try your luck with an FHA type mortgage instead.

✔ Interest-Only Mortgage Loan

This type of mortgage is only used by high income earners, that knows how to work the financial system. Most mortgage bankers would not even acknowledge that they make such a loan.

While it’s structured like an adjustable mortgage, this one only requires you make interest payment on the home loan. This is not the ideal home mortgage for the average purchaser of real estate.

The paperwork requirement is just too much to deal with.

✔ Balloon Mortgages

This is another type of mortgage that’s used by high net worth individuals. This type of mortgage has complex paperwork requirements.

The loan terms is usually for a very short term, and at the end, the whole principal amount is due or can be refinanced.

✔ Reverse mortgage

This type of mortgage is mostly geared towards seniors, looking to spend their home equity while still enjoying the dwelling they call home.

This is a mortgage loan type that is far more complex than the name sounds. There are at least three different types of reverse mortgages, with one more complex than the other.

Our court system is full of senior citizens claiming they were duped by salespeople about the true cost of the loan.

Reverse mortgages are not worth the risk to any homeowner, and with some of the papers we looked at, only a financial newbie would come to terms with such complex financial home loan notes

With so many different types of mortgage loans available, which one is better for you might depend on your financial situation.

In this low interest loan period we’re experiencing, your best bet is to get a fixed rate mortgage for your new home loan or refinancing of your existing mortgage.

While adjustable rate mortgages sounds cool, the underlying factors that determines how the interest is adjusted, mostly favors the mortgage bank.

Having certainty in your mortgage payments might not be so bad, especially when everyone expects interest rate to rise much higher in the future.