Mortgages Mortgages are probably the most complicated types of loans and have the most variations, the first being who is underwriting or guaranteeing the loan. A mortgage loan might be any one of the following: Conventional Conventional loans are those that aren’t insured by a government agency like the Federal Housing Administration (FHA), Rural Housing Service (RHS), or the Veterans Administration (VA). Conventional loans may be conforming, meaning they follow the guidelines set forth by Fannie Mae and Freddie Mac, or non-conforming, meaning they don’t meet Fannie and Freddie qualifications. FHA Loans FHA mortgage loans are insured by the government through mortgage insurance that is funded into the loan. First-time home buyers are ideal candidates for an FHA loan because the down payment requirements are minimal and the borrower’s FICO credit score does not affect the interest rate. VA Loans This type of 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 main benefit to a VA loan is the borrower does not need a down payment. The loan is guaranteed by the Department of Veteran Affairs, but funded by a conventional lender. Mortgage loans also vary greatly by repayment parameters. These days there are many options including: Fixed-Rate Mortgages A fixed-rate mortgage is one in which the interest rate on the note remains the same through the term of the loan. As a result, the payment amount and the duration of the loan are fixed. The borrower makes a consistent payment, usually monthly, for a specified number of years until the loan is paid off. These payments are amortized, meaning that, as time goes by, more of each payment is applied to the principal than to interest. The most common type of fixed-rate mortgages are 30 year and 15 year but other variations are also available. Adjustable-Rate Mortgages An adjustable-rate mortgage, commonly called an ARM, is one in which the interest rate fluctuates. It can move up or down monthly, semi-annually, or annually. In many types of ARM, the rate remains fixed for a period of time before it adjusts. For example, the rate on a 5-year ARM with a 30-year term will not be adjusted for the first five years. With any ARM, it is important to note how frequently the interest rate can adjust, plus the index and the margin used to set the new interest rate. In other words, if it is tied to the prime rate and that rate jumps by 2 points in a year, the ARM rate could jump as well. However, there is often a cap put on how much the rate can be raised in a single adjustment period. Interest-Only Mortgage 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 mortgages are indeed interest only and require a balloon payment, consisting of the original loan balance at maturity. Balloon Mortgages These mortgages are structured with a payment schedule similar to that of a thirty year fixed rate loan, although the term of the balloon loan is shorter, most often spanning five to seven years. At the end of the loan term, the outstanding balance must be paid in one lump sum, often by refinancing the home. Reverse Mortgages Reverse mortgage are available to any person over the age of 62 who has enough equity in their home. 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 (or it can be an up-front lump sum payment). The interest rate can be fixed or adjustable. When the homeowner moves out or passes, the house is sold and the mortgage is paid off. Home Equity Loans A home equity loan is a loan for a fixed amount of money that is secured by a home. The borrower agrees to repay the loan with equal monthly payments over a fixed term, just like the original mortgage. If the borrower defaults on the payments, the lender can foreclose on the home. A homeowner must have equity in the home to get a home equity loan, thus the name. The equity is the appraised value of the home minus the amount still owed on the original mortgage. Usually, the maximum loan is for a certain percentage, say 90%, of the total value of the home minus the amount of the original mortgage.