Lenders – banks and financial institutions – have their own individual mortgage products or types of mortgage loans. However, these loan products typically fall into these categories.
What is a loan product?
The very basic definition of “loan product” is simply “a type of loan account”. For example a 15-year, fixed rate mortgage is a type of loan product, specifically is it a type of mortgage loan.
The following are 3 broad categories for types of mortgage loans:
Fixed Rate Mortgage
A fixed rate mortgage loan maintains the same interest rate over the life of the loan. With a fixed interest rate, the loan provides a stable and predictable monthly payment.
Adjustable Rate Mortgage
For this type of mortgage, the interest rate is flexible and is subject to adjustments. The adjustments can be anchored to pre-set times (3, 5, 7-year adjustments) or they can be based on market conditions (tied to prime, for example). The prime rate is basically the interest rate commercial banks charge their most credit-worthy customers.
An adjustable rate mortgage can equate to lower or higher monthly payments over time. If the interest rate is set to increase on an agreed upon schedule, then monthly payments will increase. If the interest rate is tied to the prime rate, then if the prime rate goes down, the monthly payment will decrease. If the prime rate increases, then the monthly mortgage payment will increase.
Government Guaranteed Mortgages
Typically, these types of mortgage loans are available through the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA). The loans are offered to help qualified homeowners with income restrictions, or those who currently serve in the military or are veterans.
These loans generally have lower down payment requirements and may have less restrictive guidelines for qualification. However, to qualify, there are specific criteria that must be satisfied.
Some things to keep in mind
If you are shopping for a mortgage, understand your current and expected future household financial situation. Understanding the specifics and nuances of every type of mortgage product can be overwhelming at first. Working with a trusted and experienced mortgage broker can be a valuable strategy to ensure you are matched with a type of mortgage loan that makes sense for you.
Remember the key differences between fixed-rate and variable-rate mortgages.
Adjustable Rate Mortgages (ARM) usually have a lower initial rate that might be locked in for a period of time. Knowing how long you plan to stay in, or own, your home will be an important factor when considering an ARM. This type of loan may be a good choice if interest rates are high or if you plan to own or live in your home for a short time.
Fixed Rate Mortgages will lock-in an interest rate over the life of the loan, which will maintain a consistent monthly payment over the term of the mortgage. A couple things that may affect a monthly payment in a fixed rate mortgage product are property taxes and whether or not you have PMI (Private Mortage Insurance). A fixed-rate mortgage is a good choice if interest rates are low and/or you plan to own the home for a long time.
As with any financial decision, consulting a trusted and experienced resource is a smart move. For mortgages, you will want to speak with a mortgage banker to explore the types of mortgage loans available to that particular institution. A mortgage broker can offer a larger selection of mortgage products since they are not usually typed into a specific financial institution.
If you are in Connecticut or Massachusetts, and in the market for a new home, contact us and let’s review your options. As a mortgage broker, we have access to a wide range of mortgage products and can find one that works for your unique situation.
Use our Quick Quote form on our homepage or our Get Started form. Call us at (860) 285-0635 or email Mark or Samir (MHarrington@HorizonHomeMtg.com / SDoshi@HorizonHomeMtg.com), and we will connect you with any of our friendly, experienced team members.
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Read the next article in our Mortgage Basics series, “Pre-qualification and Pre-approval”