The pros and cons of different types of mortgages

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different types of mortgages

different types of mortgagesIf you’re looking to buy a home, then you’re probably not just shopping for property, but also for a mortgage. But there are so many different types of mortgages out there. Here are some of the most popular loans available, and what you should know about them:

Different Lengths

The most common mortgage has a length of 30 years. That means that if you make all of your payments in full and on time, with no additional payments, you will pay off the mortgage in 30 years. But you can choose mortgages of different lengths. Shorter mortgages result in higher monthly payments, a paid off mortgage in a shorter amount of time, and less total interest paid. For example, if you took out a $200,000 mortgage at a fixed rate of 4%, your payments and total interest paid would vary depending on the length of your mortgage, as follows:

Length of Mortgage Monthly Payment Total Interest Paid
10 years $2,024.90 $42,988.33
15 years $1,479.38 $66,287.65
20 years $1,211.96 $90,870.56
25 years $1,055.67 $116,702.10
30 years $954.83 $143,739.01
40 years $835.88 $201,220.93

The length of mortgage you choose will depend largely on your ability to make the monthly payments for the house you want to buy. For instance, if you can afford the $2,000 payment for a 10-year mortgage, you might choose instead to buy a more expensive house and carry a $400,000 mortgage for 30 years, with a monthly payment of $1,900.

Fixed and Adjustable Rates

Mortgages can have fixed or adjustable rates of interest. The traditional 30-year mortgage is a fixed rate mortgage – the interest rate is set at the time of purchase and does not change for the life of the loan, and therefore the monthly payment remains the same throughout the mortgage.

By contrast, adjustable rate mortgages, known as ARMs, have exactly what the name implies: rates that adjust during the life of the loan. Generally, an ARM starts off with a fixed rate for a fixed period of time, such as five or seven years, and then changes to a rate that “adjusts” each year for the remainder of the loan period. Because the monthly amount due can increase substantially during the adjustable period of the mortgage, ARMs tend to start off with lower rates during the fixed rate period than traditional fixed rate mortgages.

Fixed rate mortgages can be particularly beneficial if you intend to remain in your home for a long period of time, and rates are low when you take out the loan. By getting a fixed rate mortgage, you can ensure that you will benefit from the low rate for the life of the loan.

On the other hand, adjustable rate mortgages can be especially useful if you only intend to remain in your home during the fixed rate period, since your monthly payment amount will be lower due to the lower interest rate, than if you acquired a fixed rate mortgage. However, should you remain in the house after the fixed rate expires, you run the risk of higher monthly payments, depending on the new, adjusted rate.

Government-Insured Mortgages

You may have heard of FHA and VA loans, and wondered what they are. With an FHA loan, the Federal Housing Administration insures the lender against the risk that you might default on your mortgage. Similarly, with a VA loan, the Department of Veterans Affairs insures the lender against the risk of default. The major advantage of both programs is the low down payment requirement – as low as zero for some VA mortgages. These programs have different qualifying requirements, and may or may not provide better terms than a conventional (i.e., non-government insured mortgage). Therefore, if you think you may qualify for either type of loan, you should verify your eligibility and then consider that loan along with others that you qualify for to determine which mortgage is the best option for you.

Jumbo Mortgages

If you are looking to finance more than $400,000, your mortgage might be considered a “jumbo,” making it subject to higher interest rates (although rates are currently at historic lows), as well as additional qualifying requirements such as a larger down payment. If you think you might be buying a property with a jumbo mortgage, be sure to work with an experienced professional to make sure your appraisal is accurate and the mortgage is properly processed.

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Cathy is the founder of Chief Family Officer, where you can get daily updates on the hottest deals, and tips to achieve financial freedom and family bliss.