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Types of Home Mortgage Loans

By: Lesley Lyon

Mortgage is a loan that is obtained to close the gap between the cash in hand for a down payment and the purchase price of the home. While opting for a home mortgage loan, choosing the type of loan can clear half of the hurdle. There are various types of loans like fixed rate mortgage loans and adjustable rate.

In a fixed rate mortgage loan, the interest rate remains the same irrespective of the economy. Therefore the monthly mortgage payment is the same throughout in effect. The main advantage of this type of fixed rate mortgage is the certainty but the negative aspect is that the amount of the monthly installment for repayment of the loan will be a little higher in the form of a higher interest rate. When the period of fixed rate loan is longer there is a certain amount of risk for the lender because the difference in the increase of interest rate is borne by the lender and hence the higher interest rate.

On the contrary, adjustable rate mortgage rates of interest adjust periodically during the loan term. And for this type of loans the overall interest rate is low. The main disadvantage in this type is the uncertainty of the adjustment phase. During this period the monthly payments will go up and down with the changes in interest rates and it is highly unpredictable.

The third type of loan is the balloon loans or a reset mortgage which starts with the fixed interest rate for a certain number of years, usually seven to ten years which will be as low as adjustable market rates, after which period the balance should be paid in full which is a large sum of money to be paid in one lump sum. Balloon mortgages have interest rates lower than a traditional home loan.

Fixed rate mortgage can be for a term of 30 year fixed rate, which has the greatest interest reduction and easiest type to qualify for. The 20 year fixed rate offers a lower interest rate and 15 year fixed rate, which is the same as 20 years term but increases the monthly amount to be paid.

In addition there are other loans like FHA loans, VA loans and RHS loans. FHA loan is offered by the Federal Housing administration to qualified homebuyers for moderately priced homes with a low down payment, usually three to five percent VA loan is offered by the department of veteran affairs, which has the added benefit of zero down payments. This type of loan is available only to military veterans RHS loans are available to households with low or moderate income located in rural areas or small towns.

To get a fair deal in home mortgage, it is advisable to set a budget, pick the right type of mortgage, choose a suitable locale, compare the cost of loans with similar ones and most importantly inspect the home to be bought. If these things are taken care of, a home mortgage loan can be worth taking.

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