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What Types of Mortgages are Available?

While there are many mortgage products currently available on the market, here are five of some of the most common types:

1. Fixed-rate mortgages - These are considered the most traditional and stable loan products, and are calculated so that a borrower's monthly payments will entirely pay off the loan with interest during the loan's lifetime. As the name indicates, a fixed mortgage locks in a particular interest rate when it is first originated, and this rate remains the same throughout the life of the loan. Fixed mortgages can carry higher interest rates than other types of loans, but their stability makes for easier long-term financial planning.
2. Adjustable-rate mortgages (ARM) - Unlike fixed-rate mortgages, ARMs carry interest rates that will adjust yearly. The fluctuations in these rates are determined to the particular index to which they are tied, typically the one-year Treasury rates or the London Interbank Offered Rate (LIBOR) index. ARMs can also be tied to the Federal Reserve Cost of Funds index (COFI). ARMs often start out with low teaser rates that are more competitive than those associated with fixed-rate loans, but will typically adjust within the first one or two years of the loan. They are prohibited from adjusting more 2 percent points on a yearly basis and can rise no more than 6 percentage points over the life of the loan.
3. Hybrid mortgages - These loans are a mix of features from fixed as well as adjustable-rate loans – for example, a loan can have a fixed rate to begin with, then convert for the remainder of its life. They can also adjust quite frequently – every six months or more in some cases – so it's important to read the fine print.
4. Interest-only mortgages - These loans permit borrowers to pay only interest for a specified amount of time. After that introductory period, the loan adjusts so that the principal can also be paid off. While this can be a flexible way for borrowers who are short on cash to enter the market, it can also lead to sticker shock.
5. Payment-option loans - These loans give borrowers a slate of options when it comes to payment. These options include making an interest-only payment or a smaller minimum payment. Like interest-only loans, these mortgages can be flexible, but can also catch the unwary borrower by surprise when the loan amount increase rather than decreases.

Video: Hard to get a mortgage?

What is the Best Type of Mortgage for Me?

As with any other financial decision, choosing a mortgage rides largely on your individual situation. For example, if you're building your own home, you'll need a construction loan, which can be harder to find than traditional loans and vary when it comes to terms, rates, and fees.

Video: How does a construction loan work?

If you're looking to save money, a shorter mortgage translates to less interest paid over the long term. However, if you're looking for smaller monthly payments, a longer mortgage can be helpful. If you'd like to pay extra principal in order to pay off the loan faster, a 30-year fixed-rate loan may be a good choice.

If you are a senior citizen who owns his or her own home and would like to tap the equity in your home, a reverse mortgage may be a good option. The loan need not be repaid until you die, the home is sold, or you no longer live in the home. Though there are no minimum income or credit requirements, you are required to pay off any existing mortgages with the reverse mortgage and to receive loan counseling before getting the loan proceeds.