Types of Mortgage

What is Mortgage?

A mortgage is a legal agreement where a person gets a loan in exchange for collateral. The collateral can be an asset or any property of the borrower. Since there are many types of mortgages available in the market, one must have a thorough knowledge of each and every mortgage to take the maximum benefit from it. Let us see all of them in detail one by one.

Types of Mortgage

Fixed-Rate Mortgage

A fixed-rate mortgage is a mortgage whereby the rate of interest remains the same throughout the term of the mortgage (irrespective of the interest rate movement during the loan tenure). The borrower pays a fixed interest rate on an amortization basis. And, since this is an amortization structure, the monthly pay-out and the mortgage tenure are known in advance and stay fixed unless some prepayment is done. Fixed-rate mortgage loans are also referred to as vanilla wafer mortgage loans.

Adjustable-Rate Mortgage

An adjustable-rate mortgage is also called a variable-rate mortgage, a floating-rate mortgage loan, or sometimes a tracker mortgage. An adjustable-rate mortgage is a mortgage loan where the rate of interest keeps changing. The interest rate is linked to a benchmark index like LIBOR- London Inter-bank offered rate. Thus, any change in the benchmark rate causes a change in the interest rate on the mortgage. In some cases, there may not be a benchmark index-linked. Instead, the change can be at the lender’s discretion. Since the interest rate is variable, the borrower may benefit in a falling interest rate scenario and may face higher payments if interest rates rise. 

Interest-Only Mortgage

An interest-only mortgage loan is a type of mortgage where the borrower pays only the interest amount for ‘x’ years at the start. Since the interest payments are made for the initial few years, this may be risky from the credit perspective. Hence banks usually charge a higher rate of interest on such mortgages. Borrowers usually opt for this when they wish to buy assets or property with a view to selling them back in a short span of time.

For example, A home buyer may take a 30-year home mortgage loan whereby the first 7 years(say), the borrower pays only interest. After that, the same mortgage may transform into a fixed-rate or variable-rate mortgage as per suitability.

Also, refer to Mortgagee vs Mortgagor.

Graduated Payment Mortgage

A graduated payment mortgage loan is a type of mortgage where the monthly payment is lower in the initial years. And gradually keeps increasing over a specified period of time. These types of mortgages are usually designed for young borrowers who may not have higher incomes now but are likely to have higher incomes as they grow.

Balloon Mortgage

A balloon mortgage is a mortgage where the amount is not entirely amortized over the tenure of the mortgage. Therefore the monthly payments are lower than a fully amortized loan. Therefore, they have to make a large payment at the end of their tenure. The rate of a mortgage in a balloon mortgage is usually fixed. These are more common among commercial real estate loans than residential real estate loans.

Reverse Mortgage

A reverse mortgage is a mortgage that allows senior citizens (usually above the age of 62) to receive income against the house property’s equity value. Under this type of mortgage, the bank makes a payment to the homeowner against their house property. The homeowner may choose to receive a lump-sum payment, a line of credit, monthly payments, or any combination of the three, equivalent to the value of the home owned by the customer.

Also Read: First Mortgage

Offset Mortgage

Offset mortgage loans let borrowers reduce their interest liability on the mortgage by offsetting it against the interest gained on the savings account balance. The bank recalculates the interest liability on a notional of – the outstanding loan balance less the amount available in the customer’s savings bank account.

For example, let us assume a customer in XYZ bank has a loan of $ 1,000,000 at the rate of 12 percent per annum. And the same customer has a savings account balance of $ 300,000 in the same XYZ bank.

Interest amount for the month without offset feature = ($ 1,000,000*12%)/12 = $ 10,000

Interest amount for the month with offset feature = ($ 1,000,000 – $ 300,000*12%)/12 = $ 7,000

This would entail the customer to make an interest saving of $ 3,000 per month, provided he keeps $ 300,000 in the savings account.

However, since this benefit is available to borrowers, the interest charges on such loans are usually higher than the standard fixed-rate mortgage loans.

Some mortgage loan types are specific to the US Market. The explanation of these types of mortgages is below:

2 Step Mortgage

A 2 step mortgage loan is a variation of an adjustable-rate mortgage. In the case of a 2 step mortgage loan, the interest rate is different for a part tenure of the loan. And then changes to another interest rate for the remaining tenure of the loan.

Also, read – First Mortgage.

FHA Mortgage

Federal Housing Administration (FHA) is a department formed by the U.S. Federal Government that issues FHA loans. FHA loans are loans whereby the government insures the lender against the losses that might happen due to credit default by the borrower. This causes the borrower to pay extra monthly payments adjusted to the insurance premium; however, it allows the borrower to avail of houses with extremely low down payments (usually less than 5%). Hence, it provides credit support to the lender.

VA Mortgage

The VA mortgage loans are the loans issued by the U.S. Department of Veteran Affairs, whereby they offer loans to military service members and their families. Like the FHA, the federal government also guarantees these mortgages. These types of mortgage loans offer zero down payment facilities to the home loan borrower.

USDA Mortgage

The United States Department of Agriculture (USDA) offers this type of loan to rural residents. These are the people who have lower incomes and cannot achieve loans through conventional sources of finance.

Read more on Chattel Mortgage.


With increasing competition among the banks, various complex mortgage products are available in the market. A home loan borrower now has multiple types of mortgages to choose from that suit his requirement. Apart from the above listed, there are many other types that vary slightly different. Like wraparound mortgage loans, refinance mortgage loans, jumbo mortgage loans, conforming mortgage loans, etc., as additional loan options available.

Continue reading – Mortgage Vs. Hypothecation.

Sanjay Borad

Sanjay Bulaki Borad

Sanjay Borad is the founder & CEO of eFinanceManagement. He is passionate about keeping and making things simple and easy. Running this blog since 2009 and trying to explain "Financial Management Concepts in Layman's Terms".

1 thought on “Types of Mortgage”

  1. Great and very helpful information regarding the types of mortgage, as far more and more people are applying for this process. In order to apply for mortgage you need to qualify and at the same time make sure that your credit has good stand. The type of mortgage you are about to consider will also have an effect on your term.


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