There are many different types of mortgages on the market today. The following mortgage glossary briefly explains some of the most common types of loans available to you. Our mortgage glossary was created to help you understand how these different loan options work so you can be more educated when you start shopping for a loan but consulting an experienced loan officer may be necessary.

Conventional Loan

Conventional loans, also know as fixed-rate-mortgages (FRM), are those that have an interest rate that does not change. Conventional loans have an amortization schedule that corresponds with term length of 10, 15, 20, 30 or 40 years. This type of loan is not guaranteed or insured by the government. Typically, mortgage bankers and savings & loans banks are the institutions that fund conventional loans.

Interest Only Loans

An interest only loan is when the monthly payment is only applied to the monthly interest accrued. Interest only loans are usually amortized over a 30 year period with a fixed interest rate for the first 2 years. At the start of your third year, the interest rate often becomes adjustable to whatever the current indexed rate is and can change from month to month.

Reverse Mortgage

A reverse mortgage is exactly that, a mortgage with a reversed payment steam where the mortgage pays you instead of you paying the mortgage. A reverse mortgage is for older homeowners (62+) who have a need to draw on part of their homes equity for what ever reason. It can be used as a tax-free income without having to sell, give up title, or take on another mortgage payment.

For complete details about reverse mortgages, we highly recommend that you visit ReverseMortgage.org

Option ARM Mortgage

An option ARM mortgage is one that gives 4 payment options to choose from each month.

1. The Lowest Payment: The first years’ monthly payments include both principle & interest, but calculated at 1% instead of the indexed rate. The catch: the difference in interest of what you are paying and the indexed rate is being added back on top of your original amount borrowed.
2. Interest Only Payment: Here you have the choice to pay only the monthly interest. The upside over option 1 is your loan amount doesn’t increase, the downside is your loan amount doesn’t decrease.
3. 30 Year Amortized: Monthly payment pays principle and interest at the full indexed interest rate over a 30 year period.
4. 15 Year Amortized: Monthly payment pays principle and interest at the full indexed interest rate over a 15 year period.

An Option ARM Mortgage is not for everyone. This loan is one of the main reasons the foreclosure rate is on the rise; people bought more house than they could reasonably afford and only made the minimum payment which resulted in their loan amount increasing significantly as did their monthly payment in the second year of owning their home.

Balloon Mortgage

A Balloon Mortgage is when your loan amount is amortized over a 30 year period at a fixed interest rate, but the term of the loan is usually between 5 – 7 years. Payments made are applied to both the principle and interest.

The balloon portion of this loan comes at the end of the 5 or 7 year term and the remaining balance of the loan must be paid in full. At end of the term you will need to refinance the balance into a new mortgage, sell the property, or convert the current mortgage to a traditional one at current interest rates.

A balloon mortgage is sometimes a good option for a first-time home buyer because these mortgages usually carry a lower interest rate than a conventional loan, ultimately lowering the monthly payment. Most often the balance is then refinanced into another mortgage at the end of the term.

If entering into a Balloon Mortgage it’s a smart idea to include a pre-payment with your monthly payment. This pre-payment is applied to the principal balance which can significantly reduce the unpaid balance at the end of the term.

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