Types of Mortgage

1–3A first time home buyer needs to know different types of home mortgage loans available before actually going in for one. The article explains different types of mortgage options and their features.

Types of Mortgage

Fixed Rate Mortgage

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

Adjustable Rate Mortgage

Adjustable rate mortgage is also called a variable rate mortgage, floating rate mortgage loans, or sometimes these are also called as tracker mortgage. An adjustable rate mortgage is a mortgage loan where the rate of interest on the loan is not fixed but keeps changing. The interest rate is linked to a benchmark (index- e.g. LIBOR- London Inter-bank offered rate) and thus any change in the rate of the benchmark 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 lenders discretion. Since the rate of interest on the loan 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 loan where the borrower pays only the interest amount for ‘x’ years at the start. Since only interest payments are made for initial few years, this may be risky from the credit perspective and hence banks usually charge a higher rate of interest on such loans. Borrowers usually take this loan when they wish to buy homes with a view to selling it 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 and thereafter the same loan may be converted to a fixed rate mortgage or variable rate mortgage as it may be suitable.

Graduated Payment Mortgage

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

Balloon Mortgage

Balloon mortgage loans are loans where the loan amount is not completely amortized over the tenure of the loan; therefore the monthly payments are lower than a fully amortized loan and have a large payment to be made at the end of the tenure. These are usually fixed-rate mortgages and are more common among commercial real estate loans than in residential real estate loans.

Reverse Mortgage

A reverse mortgage is a loan that allows senior citizens (usually above the age of 62) to receive income against the equity value of the house property owned by them. This is called a reverse mortgage as the bank makes payment to the homeowner in return for the 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.

Offset Mortgage

Offset mortgage loans lets borrowers reduce their interest liability on the mortgage by offsetting it against the interest gained on 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, & 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 savings account.

However since this benefit is made available to borrowers, the rate of interest charged on such loans is usually higher than the standard fixed rate mortgage loans.

Some mortgage loan types are specific to the US Market. These mortgage types are explained below.

2 Step Mortgage

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

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 houses with extremely low down payments (usually less than 5%) and it provides credit support to the lender.

VA Mortgage

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

USDA Mortgage

The United States Department of Agriculture (USDA) offers this type of loans to rural residents who have lower income and are unable to achieve loan through conventional sources of finance.


With increasing competition among the banks, various complex mortgage products are available in the market. A home loan borrower now has a variety of types of mortgages to choose from that suit his requirement. Apart from the above listed there are many other types which vary slightly like wraparound mortgage loans, refinance mortgage loans, jumbo mortgage loans, conforming mortgage loans etc. as additional loan options available.1–3

Types of Mortgages. Mortgage Calculator. September 2018. [Source]
The Different Types of Mortgage Loans in 2018, Explained. HBI. September 2018. [Source]
Mortgages | USAGov. September 2018. [Source]
Last updated on : August 27th, 2019
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  1. Avatar Paul Sharp

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