Kind of Mortgage

The two most common mortgages in the United States are the fixed-rate mortgage and the adjustable-rate mortgage. With a fixed-rate mortgage, the interest rate stays the same over the life of the loan. With an adjustable-rate mortgage (ARM), the interest rate can change at the end of pre-determined intervals, such as every six months or every year. The interest rate is tied to changes in a published index that reflects the current interest rate. One widely-used index is the interest rate of United States Treasury bonds. If the index has gone up at the end of the adjustment period, the mortgage rate goes up, and thus the borrower's payment also goes up. Conversely, if the index has gone down, the mortgage rate goes down, and the mortgage payment goes down. Neither the lender nor the borrower can influence or predict in which direction the index will move. Most ARMs have a maximum interest rate cap.

Other, less common mortgages include the balloon mortgage and the graduated payment mortgage. A balloon mortgage is a short-term loan. The borrower makes payments for some period of time and then makes one large payment at the end. The graduated payment mortgage starts out with low monthly payments, which gradually increase over time before stabilizing.

In the United States certain government programs make it easier for borrowers to obtain a mortgage by lessening the risks for the lenders. Programs administered by the Federal Housing Administration (FHA) help low- and moderate-income borrowers obtain loans for housing by providing insurance for lenders against borrower default. The borrower pays for the mortgage insurance by paying a fee to the FHA. If the borrower defaults, the FHA will compensate the lender should the house sell for less than the amount of the mortgage debt. The Veterans Administration (VA) administers programs that guarantee loans made to qualified veterans. If the borrower defaults, the VA repays the lender a specified part of the mortgage loan. Other agencies buy mortgages from lenders and sell them to investors. The money the lender receives from the sale can be used to issue additional mortgages. These agencies include the Federal National Mortgage Association (FNMA or “Fannie Mae”), the Federal Home Loan Mortgage Corporation (FHLMC or “Freddie Mac”), and the Government National Mortgage Association (GNMA or “Ginnie Mae”).