Historically, there were three mortgage loan types available to a home buyer. Buyers could get a fixed-rate conventional mortgage, an FHA loan, or a VA loan.
Times have definitely changed. Now there are a dizzying array of mortgage loan types available—as the saying goes: More mortgage loan types than you can shake a stick at. Learn about the most common ones and the differences between them.
Popular Types of Mortgage Loan Programs
Fixed-Rate Mortgage Types
Fixed-rate mortgage loans come in 5-year, 10-year, 15-year, 20-year-, 30-year, 40-year, and even 50-year timeframes, all of which are completely amortized.
FHA mortgage loan types are insured by the government through mortgage insurance that is funded into the loan. First-time homebuyers are ideal candidates for an FHA loan because the down payment requirements are minimal and FICO scores do not matter.
The VA loan is a government loan is available to veterans who have served in the U.S. Armed Services and, in certain cases, to spouses of deceased veterans. The requirements vary depending on the year of service and whether the discharge was honorable or dishonorable.
The main benefit of a VA loan is the borrower does not need a down payment. The loan is guaranteed by the Department of Veterans Affairs but funded by a conventional lender.
USDA loans are offered through the U.S. Department of Agriculture for eligible homebuyers who want to purchase a rural property. Oftentimes, there is no down payment, and a USDA loan may even be more affordable than an FHA loan.
Interest-Only Mortgage Types
Calling a mortgage loan type an "interest-only mortgage" is a bit misleading because these loans are not really interest-only, meaning the borrower pays only interest on the loan.
Interest-only loans contain an option to make an interest-only payment. The option is available only for a certain period of time. However, some junior mortgages are indeed interest-only and require a balloon payment, consisting of the original loan balance at maturity.
Hybrid Types of Mortgage Loans
Adjustable-Rate Mortgage Types
Adjustable-rate mortgages (ARMs) come in many shapes and sizes. The interest rate fluctuates. It can move up or down monthly, semi-annually, annually, or remain fixed for a period of time before it adjusts.
Option ARM Mortgage Types
Option ARM loans are complicated. They are adjustable-rate mortgages, meaning the interest rate fluctuates periodically. As the name implies, borrowers can choose from a variety of payment options and index rates.
But beware of the minimum payment option, which can result in negative amortization.
Combo/Piggyback Mortgage Loan Types
This type of mortgage financing consists of two loans: a first mortgage and a second mortgage. The mortgages can be adjustable-rate mortgages, fixed-rate mortgages, or a combination of the two. Borrowers take out two loans when the down payment is less than 20% to avoid paying private mortgage insurance.
Borrowers who want to pay a lower interest rate initially often opt for mortgage buydowns. The interest rate is reduced because fees are paid to lower the rate, which is why it's called a buydown. Buyers, sellers, or lenders can buy down the interest rate for the borrower.
Specialty Mortgage Loan Types
Streamlined-K Mortgage Loans
Similar to the 203(k) loan program, FHA has another program that provides funds to a borrower to fix up a home by rolling the funds into one loan. The dollar limits for repair work are lower on a Streamlined-K loan, but it requires less paperwork and is easier to obtain than a 203(k).
These types of mortgage loans are used when a seller has put a home on the market—but it has not yet sold—and the seller wants to borrow equity to buy another home. The seller's existing home is used as security for a bridge, or swing, loan.
Equity Mortgage Loan Types
Equity loans are second in position and junior to the existing first mortgage. Borrowers take out equity loans to receive cash. The loans can be adjustable, fixed, or a line of credit from which the borrower can draw funds as needed.
Shared Appreciation Mortgages
Although they are rare in the U.S., shared appreciation mortgages allow homebuyers to share a portion of their property’s value gains with an investor or lender. Because this offers the lender a guaranteed return, it typically means a lower interest rate and a lower monthly payment on the loan.
Reverse mortgages are available to any person over the age of 62 who has enough equity. Instead of making monthly payments to the lender, the lender makes monthly payments to the borrower for as long as the borrower resides in the home.
The interest rate can be fixed or adjustable. Get independent advice from a trusted advisor before taking out a reverse mortgage.