The most common types of residential mortgage loans are fixed rate loans, adjustable rate loans, and conventional loans.
FHA Loans : are loans that are insured by the Federal Housing Administration.
Fixed Rate Loans : are so called because of the fixed interest rate feature. The monthly payments are amortized into equal, unchanging installments which are paid each month for the entire loan term.
Adjustable Rate Mortgages (ARM) : are loans in which the interest rate and payment adjust according to current market indicators, also called indexes. Treasury Bills, prime interest rates, and average Cost of Funds are often used as indices. An initial rate and payment amount is re calculated according to the index at the time of the first adjustment by adding a margin of specific percentage. Most ARM’s have caps which limit the amount of change that can take place for each adjustment: payment caps which limit the dollar amount that can take place, adjustment caps which put a limit in the percentage of increase for each adjustment, and life-time caps that establish a maximum interest rate for the life of the loan no matter what the index plus the margin may equal.
Conventional Loans : are loans made without any additional guarantees for repayment, such as FHA insurance, DVA guarantees, or private insurance. Usually given at an 80 percent loan-to-value (LTV) ratio.
Non-Conventional Loans : are loans for which either the borrower or the lending guidelines do not conform to industry standards, e.g. jumbo loans.