13 Types of Mortgages to Choose From When Buying a Home

7. Mortgage with an adjustable rate

An adjustable-rate mortgage, also known as an ARM, keeps your interest rate constant for the first few years before changing on a regular basis — often once a year. For example, if you have a 5/1 ARM, your introductory rate term is five years, and your rate will change annually.

8. Loan for construction

If you are building a house and need finance to cover permits, supplies, and labor, you may require a construction loan. Construction loans are often one-year loans with higher interest rates than traditional mortgages.

You can pay off your loan once construction is finished, or you can roll it into a standard mortgage. You can apply for a renovation loan if you intend to buy a home and make considerable alterations to it. The funds borrowed for renovations will be added to your mortgage.

9. Mortgage balloon

For the first five years or so, you’ll make monthly payments like you would for any other sort of mortgage. At the end of the initial payment period, you’ll pay off the remaining balance in one lump sum.

Although balloon mortgages have low-interest rates, they are dangerous. If you plan to sell or refinance your house before the original payment period finishes, a balloon mortgage may be right for you. This way, you’ll profit from the reduced rate without having to pay a large sum of money all at once.

You also may prefer a balloon mortgage if you expect to receive a lot of money in the interval between receiving the mortgage and paying off the complete amount. However, this thinking might be risky, especially if the money you were expecting does not materialize.

Balloon mortgages are dangerous for both the buyer and the lender, so finding one may be difficult.

10. Interest-only loan

You borrow money as you would with any other sort of mortgage and make monthly payments with an interest-only mortgage. However, you merely pay out the lender’s interest, not the principal (the amount of money you borrow).

Interest-only mortgages have a defined term, such as ten years, during which you will only make interest payments. When that term expires, you will begin paying both principal and interest.