Ever since lending institutions first started, offering mortgages, potential homebuyers have been presented with a baffling array of options for financing their home purchases. The terms and conditions of mortgages have changed over time, but the basic underlying principles remain unchanged. In this article, we’ll consider each of the main types of mortgages and briefly describe their advantages and disadvantages.

Fixed-Rate Mortgages

A fixed-rate mortgage is the standard type of mortgage that most people want to have. It has also been around for the longest period of time. A fixed-rate mortgage has a clearly defined term (often of 30 years) and a fixed interest rate for calculating the monthly premiums. If you have a fixed-rate mortgage, you know exactly how much you’ll be paying each month for the duration of the loan. This helps people develop their budgets and plan future expenses. Holders of fixed-rate mortgages are protecting from the changing market interest rate, because once they sign the loan document, the rate cannot change.
Adjustable-Rate Mortgages

In contrast, an adjustable-rate mortgage does not have a fixed interest rate (and, consequently, does not have fixed monthly premiums). People opt for adjustable-rate mortgages because they hope that the market interest rate will go down, but it can just as easily go up, leaving these mortgage holders strapped for cash as they have to pay higher and higher monthly premiums. If you’re risk-averse, an adjustable-rate mortgage probably isn’t your best option. However, every once in a while they work out well – it simply depends on how the market interest rate changes over the life of the loan.

Balloon Mortgages

A balloon mortgage is a risky way to finance a home purchase. During the first part of the loan, the mortgage holder pays only interest, and the payments are quite low in comparison with a more traditional mortgage. However, once that 5-10 year period is over, the mortgage holder needs to pay the rest of the loan all at once in one lump payment, also known as the balloon payment. If you know that you’ll be living in that home for only a short period of time, a balloon mortgage might be a good option. But if your home purchase is for a long-term living arrangement, you should find another type of mortgage, so that you won’t have to pay a huge amount of money all at once in the future.

VA & FHA Loans

The government sponsors some types of home loans. The Veterans’ Administration offers VA loans to war veterans; the Federal Housing Administration offers FHA home loans to other prospective home buyers. These mortgages have strict eligibility requirements regarding the individual who applies for the loan and the type of house that will be purchased.
These are the most common types of mortgages, but do more research and learn what options are available to you, because selecting the right mortgage has a huge impact on your financial future.