While there are many types of mortgage loans, the two most common types of mortgages are the fixed rate mortgage (FRM) and the adjustable rate mortgage (ARM). You may also encounter offers for interest only mortgages, balloon mortgages & reverse mortgages. payment loans.
A fixed rate mortgage (FRM) has an interest rate that remains fixed for the life (sometimes called 'term') of the loan. FRMs are usually offered for 10, 15, 20 or 30 years. The advantage of a fixed rate mortgage is that you know exactly what you will pay each month until the loan is paid off. The disadvantage of an FRM is that you may end up paying more interest than you need to if the interest rates go down. Of course, the reverse is true as well - with a fixed rate mortgage you're protected should interest rates go up.
With an adjustable rate mortgage (ARM), the interest rate can change up or down over the life of the loan. Typically an ARM starts with the interest rate set for one, two or three years. After that, the bank may adjust the interest rate they charge you on a set schedule. Usually the bank can change your interest rate every year on the anniversary of your loan. The rate your bank charges you changes with some agreed upon standard -- called a 'market index.' Common market indices are the prime rate (the rate banks charge their best customers) or the interest rate on U.S. Treasury Bills. The advantage of an ARM is that you often get a very good introductory rate which helps keep your payment low in the first years of the mortgage. This can be very useful if you plan to move in the near future - before the your loan's interest rate has gone up.
Interest only loans are less common but are available. With an interest only loan, you pay just that - the interest you owe on the principal, without paying off any of the principal. The advantage is that you make very low payments. The disadvantage is that you never pay off the loan - which means you never really own your house. Interest only loans are usually used by real estate speculators who buy houses hoping they will increase in value rapidly.
Balloon payment loans allow you to put off paying some of the loan's principal for a set number of years. You make a lower monthly but are not paying off very much of the loan. When the term is up, you have to make the 'balloon' payment - all of the principal you didn't pay in your monthly payments. These loans are often used by people who know they won't live in a particular house very long. They bet that the value of the house will go up enough to cover the balloon payment when they sell it.
Reverse Mortgages are special mortgages for senior citizens -- at least 62 years old -- who own and live in their own house. A reverse mortgage lets you borrow against the equity in your house, but unlike other mortgages, no payments are required while you use the house as your principal residence.
Before settling on a particular type of loan, you need good advice from a financial professional or your lawyer. Be sure you understand the advantages and disadvantages of each type and how each would work in your particular situation.
If you haven't applied for your mortgage yet, here's a list of lenders that let you apply free online.