Types of Mortgages
Over the past decade, financial service providers have developed a wide array of new
products and services to help people buy homes. And, while innovative products can
help some people, they can spell disaster for others.
This sheet offers a brief overview of popular products on the market. It is not
designed to be comprehensive nor does it take into account the vast differences
among lenders. Rather, it should provide you with a general sense of each product
and a starting point for your own research.
Fixed Rate Mortgage
The most common type of residential home loan, it is repaid through equal
monthly payments over a specific period of time – usually 15 or 30 years. In
most cases, payments early in the loan go mostly toward interest while later
payments are applied mostly to principal.
Adjustable Rate Mortgage
Often referred to as an ARM, the interest rate of this mortgage can change over
time. Most ARM’s start with a lower, fixed rate for the first 3-10 years. After
that, the interest rate becomes adjustable and can rise. How much it can
change depends on several factors. Borrowers should be careful to fully
understand the terms.
Interest Only Mortgage
During an interest only mortgage, a borrower repays only interest owed on the
loan for a period of time, usually five to seven years. After that, payments go
up, sometimes significantly, to include principal. The initially lower monthly
payments allow some people to qualify for larger loans.
Piggy Back Mortgage
Also known as blended mortgages, 80/20 mortgages, or 80/10/10 mortgages,
piggy back mortgages are really two different mortgages made at the same
time. The purpose is to allow the homebuyer to buy a home with less than a
20% down payment but avoid paying for private mortgage insurance (PMI).
Typically, a first mortgage is made for 80% of the purchase price. After that,
any downpayment is applied and a second mortgage is taken out for the un-
financed amount that remains.