What types of mortgage financing are there?

  In general, three broad categories of loans are available: 1. Private versus government loans - Most mortgage loans are made by savings institutions, banks and mortgage companies. On government (FHA and VA) loans, the government does not actually loan the money but rather guarantees (or insures) to repay the lender if you default for some reason. Generally, a lender will require you to buy mortgage insurance if you are putting less than 20% down. This insurance may be paid at closing or added to the loan amount. VA loans require no mortgage insurance, but only qualified veterans may apply for them. Mortgage insurance protects the lender, to a degree, in the event the monthly payments are not made. Government loans have important advantages - they generally require a lower down payment than conventional loans and often have a lower interest rate or points. One the negative side, government loans limit the amount you can borrow, often take longer to process, and have higher closing costs. 2. Fixed rate versus adjustable rate - On a fixed rate mortgage, the interest rate stays the same over the life of the loan, usually 15 or 30 years. That means your payment will not change except for tax and insurance adjustments. Adjustable rate mortgages go by a variety of names, but basically these loans have interest rates or monthly payments that fluctuate over time according to a pre-determined index. These mortgages typically start out with a lower interest rate, lower monthly payments, and lower fees and points than fixed rate mortgages. They often appeal to first-time home buyers, younger couples who expect their incomes to grow in the coming years. If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Also ask about the index that will be used to calculate future interest rates and how index changes will affect your mortgage. 3. Assumable versus new loan - Some loans, particularly FHA and VA loans as well as some adjustable rate mortgages, are assumable. That means a buyer can assume an existing loan usually on the same terms as the previous owner. Assuming a loan may save some costs and time. As the buyer, you may pay the lender a fee at closing for processing the assumption and most lenders will require you to qualify for the existing loan.