Fixed-Rate Mortgages (FRM)
Fixed-rate mortgages are just that—the interest rate is fixed for the duration of the loan. Fixed-rate mortgages are the more traditional type of loan, usually having a repayment term of 30 years, though some mortgages offer longer terms of 40 or 50 years, or as little as 15. While they offer security and stability, fixed-rate mortgages are generally more expensive to obtain and tougher to qualify for. Some unique fixed-rate mortgages include:
- Federal Housing Administration mortgage (FHA). This is commonly referred to as a first-time homebuyers mortgage, as it’s insured through the Federal Housing Administration and offers assistance to home buyers who may not otherwise qualify for a mortgage.
- Veterans Administration mortgage (VA). Similar to the FHA loan, VA loans are available only to eligible U.S. military veterans and their spouses, and they’re guaranteed by the U.S. Department of Veterans Affairs.
Adjustable-Rate Mortgages (ARM)
Adjustable-rate mortgages are subject to interest rate changes for the duration of the loan. Adjustable-rate mortgages come in a wide variety of styles and options, they are generally easier to obtain and are usually more affordable. The trade off is that adjustable-rate mortgages typically come with a greater set of risks, most notably an unexpected payment jump due to increasing interest rates, or an extension of the loan duration. Some common adjustable-rate mortgages include:
- Option ARM. This loan offers buyers a variety of payment options and amounts, which can be useful for buyers with a fluctuating income. Choosing the minimum payment can be dangerous, however, as it can lead to negative amortization—where the payment doesn’t cover the interest, which is then added to the principal loan.
- Fixed-period ARM. This loan will maintain a set interest rate for a specified amount of time, then adjust accordingly. The length of the term and how often it changes can vary depending on the terms of the loan.