Here is a helpful overview of common mortgage terms.
- Adjustable-rate mortgage or ARM – A mortgage where the interest rate adjusts relative to a specified index + margin.
- Fixed-rate mortgage or FRM – A mortgage where the interest rate and payment are fixed for the term of the loan.
- Balloon payment mortgage – A mortgage most commonly used in commercial real estate. The Balloon payment mortgage does not fully amortize over the term of the note, which leaves a balance due at maturity, known as a “balloon payment.”
- Interest-only mortgage – A type of mortgage where the borrower pays only the accruing interest on the principal balance. These payments on interest leave the principal balance unchanged.
- FHA mortgage – A US Federal Housing Administration mortgage insurance backed mortgage loan that is provided by an FHA-approved lender.
- VA mortgage – A VA loan is a $0-down mortgage option issued by private lenders and partially backed, or guaranteed, by the Department of Veterans Affairs (VA).
How to Choose a Mortgage Type
The key to choosing the right mortgage type is understanding the different mortgages available, as well as their pros and cons.
Adjustable-rate mortgage or ARM
A variable-rate mortgage, or adjustable-rate mortgage (ARM), is a mortgage loan with the interest rate on the note periodically adjusted based on an index that reflects the cost to the lender of borrowing on the credit markets. The loan may be offered at the lender’s standard variable rate/base rate.
Fixed-rate mortgage or FRM
A fixed-rate mortgage (FRM) is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust. As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan benefits from a consistent, single payment and the ability to plan a budget based on this fixed cost.
Balloon payment mortgage
A balloon payment mortgage is a mortgage that does not fully amortize over the term of the note, thus leaving a balance due at maturity. The final payment is called a balloon payment because of its large size.
An interest-only loan is a loan in which the borrower pays only the interest for some or all of the term, with the principal balance unchanged during the interest-only period. At the end of the interest-only term the borrower must renegotiate another interest-only mortgage, pay the principal, or, if previously agreed, convert the loan to a principal-and-interest payment (amortized) loan at the borrower’s option.
FHA insured mortgage
FHA-insured loans are a type of federal assistance. They have historically allowed lower-income Americans to borrow money to purchase a home that they would not otherwise be able to afford. FHA loans are different from conventional loans in the sense that the house must be owner-occupant for at least a year.
The VA loan is a $0 down mortgage option available to Veterans, Service Members, and select military spouses. VA loans are issued by private lenders, such as a mortgage company or bank, and guaranteed by the U.S. Department of Veterans Affairs (VA).