This is the most common type of mortgage. Nearly 70% of mortgages originated in the United States fall into this category. These mortgages are the least risky, because their rates and thus the borrowers payments are fixed for the life of the loan. Fixed rate mortgages are typically made for a period of 30 years or 15 years, although in recent years, banks have begun offering 40 year mortgages as well.
As the name suggests, borrowers with interest only mortgages do not have to pay any principal, but instead pay only the monthly interest on their loans. These loans are typically incorporated as part of another type of loan. For instance, a 30 yr fixed may be interest only for the first 10 years. Over the last 20 years of the loan the borrower pays both principal and interest until the loan is paid off. The advantage of these loans is that the initial monthly payments are lower than the payments would be on a similar fixed rate loan. The disadvantage is that once the interest only period has expired, the borrower has to pay higher payments over the remainder of the loan, to make up for the interest only period.
These loans, which have become notorious in recent years are available in 1, 3, 5, 7 and 10 year terms. These mortgages have a fixed rate of interest for during their initial period, after which the rate adjusts based on whatever index the loan is tied to. During the initial period, the borrower pays a lower rate of interest. For instance, the 5yr ARM may have an interest rate of 5% vs. 5.5% for a 30yr fixed mortgage. At the end of the 5 years however, the interest rate is no longer fixed and is reset. If labor is 7%, then the borrower pays 7%. These mortgages can be cheaper than 30yr fixed mortgages, especially in the beginning, but are also riskier.
This loan product functions in the opposite manner of most other types of loans. The payments are set at a level where they do not full cover the interest on the loan. Overtime, the amount that the borrower owes the lender increases as the unpaid interest is added to the initial debt. This loan can sometimes be beneficial to the elderly who need additional cash in their last years. They can borrow against the equity in their house, under the condition that the loan will be repaid by selling the house upon their death.
The other program is the U.S. Department of Agricultures Rural Development Single Family Housing Loan Guarantee Program.100% financing at a very low rate.
Sometimes called a "Rural Housing Loan" or a "Section 502" loan, todays USDA financing is not just for farms. Because of the way the USDA defines "rural", there are plenty of exurban and suburban neighborhoods nationwide in which USDA loans can be used.
Home buyers who buy a home in a qualified USDA area, and who meet USDA income eligibility requirements, can take advantage of the USDAs low mortgage rates and a program which required no down payment whatsoever.
FHA loans are insured by the Federal Housing Administration. These loans are especially meant for first time home buyers. Typically the criteria for qualifying for these loans are less stringent than other types of loans. Moreover, borrowers can qualify for FHA loans with down payments as low as 31/2%
VA loans are available to veterans. These loans require little to no down payment, as long as the applicant can demonstrate the capacity to pay back the loan.
Section 502 loans are available to low income individuals who want to purchase properties in rural areas.
