Mortgage Loan Types

Mortgage loans are an enormous financial responsibility. For most people their homes are the single largest purchase made in a lifetime. Decisions made regarding your mortgage need to be made with care to avoid making common mistakes that cause you to overpay for your mortgage loan. Here are the basics to help you avoid common mortgage mistakes.

Your grandparents had very few choices when it came to mortgages: they had a choice between a fixed rate loan of 15 or 30 years. Today, there are dozens of choices; however, choosing the wrong loan could cost you thousands of dollars. Mortgages today fall in three basic categories: fixed interest rate, adjustable interest rate, balloon mortgages, and jumbo mortgages.

Fixed Interest Rate Mortgage Loans

A fixed interest rate mortgage loan is the least risky conventional mortgage offering. These mortgages have an interest rate that does not change over the life of the mortgage, and as a result of this fixed rate the monthly payment remains the same for every month of the mortgage. If you pay your property taxes and insurance in escrow with your mortgage payment, you may see increases in your monthly payment because of the taxes and insurance, but not the interest rate. If your tolerance for financial risk is extremely low this is the mortgage loan for you.

Adjustable Rate Mortgage Loans

There are many types of adjustable rate mortgages with varying degrees of risk; however, they all have one thing in common. These mortgages come with variable interest rates that your lender will adjust at regular intervals over the course of the loan. The interest rate your mortgage will adjust to is a financial index plus your lender’s markup. When interest rates change in the market your interest rate will go up and down accordingly. Because your monthly payment will change when the lender adjusts the interest rate you need to be prepared to pay more or less depending on which way interest rates are going.

Balloon Mortgages

A balloon mortgage offers low monthly payments for a period of five to seven years. At the end of this period the entire loan balance becomes due in one payment. If you are unable to payoff the entire loan balance you will be forced to refinance or sell your home. These mortgages are great for homeowners that have short-term financing needs. If you are unable to refinance the loan or sell you risk losing your home when the balloon payment is due.

Jumbo Mortgages

Traditional mortgage lenders do not typically loan more than $417,000 in 2006 for a single family mortgage loan. If your mortgage needs require more, you will need to find a jumbo mortgage lender. If you can afford a much larger mortgage payment and have good credit a jumbo loan could meet your mortgage needs. To learn more about your mortgage options and how to avoid common mortgage mistakes, register for a free mortgage guidebook.