The purchase of a new home will no doubt be one of the most exciting moments in your life. It is also likely to be the largest financial obligation you take on in your time on earth. There are eight types of mortgages available to you when you are ready to purchase a home. It is important that you understand each of these options so that you can make the best choice possible.

Fixed Rate Mortgage

This is the most conventional of the eight mortgage types and is often referred to as a conventional mortgage. This standard mortgage often requires a downpayment of up to 20 percent and require a consistent monthly payment over the life of the loan. Terms for a conventional loan can be from 10 to 40 years with 15 and 30 year fixed rate mortgages being the most popular. A fixed-rate mortgage is perfect for the homeowner who values the security of knowing exactly how much they have to pay on a mortgage each month. Borrowers considering this loan option would do well to clean up their credit before applying for a fixed-rate mortgage. One important aspect of this credit clean-up should be using a service like the one supplied by LendVia to pay down credit card debt.

Interest Only Mortgage

Individuals who opt for an interest-only mortgage will be required to only pay the interest on the loan for the first five to ten years of the life of the loan. This mortgage method will increase the amount of time necessary to pay off the mortgage but can be a great help in a time when a borrower is experiencing financial difficulty. Once the interest-only period of the mortgage is complete the remainder of the loan operates like a conventional mortgage.

Adjustable Rate Mortgage

The main idea of an adjustable-rate mortgage is that the interest paid on the loan will change over time. The change in interest rates will be determined by current economic situations and the present cost to borrow money. There are many ways to structure an adjustable-rate mortgage but one common arrangement is known as a 5/1 ARM. This allows for the interest rate to remain the same for the first five years of a mortgage. After the five-year period, the interest can be changed free of charge for the remaining 25 years of the loan.

Veterans Administration Loans

VA loans are available to make it a little easier for veterans and their spouses to become homeowners. These loans do not require a downpayment from the veteran and while a private lender is the loan originator, the mortgage is backed by the Department of Veteran Affairs.

Another significant advantage to veterans who opt to use the VA loan alternative is they are often able to get better rates than would have otherwise been available to them. The VA loan is only available for homes to be used as the primary residence for the eligible borrower.

FHA Loan

FHA loans are backed by the Federal Housing Administration. These loans are both beneficial and popular with first time home buyers. Much of the popularity regarding FHA loans is the fact homebuyers only need a 580 credit score to qualify for a downpayment of 3.5 percent. Borrowers with credit scores as low as 500 can still obtain an FHA backed mortgage with a downpayment of 10 percent. FHA loans were created in the 1930s and protect lenders against the possibility of borrower default.

Balloon

The payments for a balloon loan are not fully amortized over the life of the loan. In many cases, borrowers are allowed to pay only the interest on a balloon mortgage for a predetermined period of time. Once this interest-only term of the mortgage is complete, the full balance of the loan is due. The term 'balloon' is used in reference to the often large payment that becomes due at the end of the loan term. Balloon mortgages are more popular with commercial real estate but are also available for residential real estate purchases. It is not uncommon for borrowers to obtain a conventional mortgage to satisfy the balloon payment requirement.

Combo Mortgage

Combo loans consist of two separate loans originated by the same lender and delivered to the same borrower. For example, a borrower may wish to use an adjustable-rate loan to pay for home construction or repairs before following up with a conventional mortgage loan once the home is completed. The norm is for the second mortgage to pay off the first loan which leaves the borrower with one mortgage to deal with. Combo loans are great options for people who need to borrow more money than their downpayment would allow with other loans.

Jumbo

A jumbo mortgage is a loan in an amount that exceeds the limit set by the Federal Finance Housing Agency. This means these loans are not eligible for backing by government entities Freddie Mac and Fannie Mae.

The limit for government-backed loans in the United States is $484,350 in most places. However, the limit is $726,525 in Hawaii, Guam, Alaska, and the U.S. Virgin Islands.

The Takeaway

When purchasing a home or other piece of property, there are usually more mortgage options available to the borrower than most people understand. It is important for a borrower to know as much about these mortgage options as possible to guarantee themselves the best possible property buying experience. Above, you will find the eight types of mortgages available to borrowers and a quick background on each of these options