Fixed and variable-rate mortgages come in various types to suit different borrower needs. Here's a breakdown of each:

Fixed-Rate Mortgages (FRMs)

A fixed-rate mortgage has a constant interest rate throughout the loan term. Monthly payments for principal and interest remain the same. Types of fixed-rate mortgages include:

1. Conventional Fixed-Rate Mortgage

   • Terms: Typically 10, 15, 20, 30, or 40 years.
   • Best for: Borrowers who want predictable payments over a long term.

2. Interest-Only Fixed Mortgage

   • Features: The borrower pays only interest for a specified period (e.g., 5–10 years), after which payments include principal.
   • Best for: Borrowers with fluctuating income who anticipate higher earnings in the future.

3. Jumbo Fixed-Rate Mortgage

   • Features: Loans exceeding conforming limits set by the Federal Housing Finance Agency (FHFA).
   • Best for: Buyers of high-value homes.

4. Balloon Mortgage

   • Features: Lower monthly payments for a fixed term (e.g., 5–7 years), after which the entire balance is due in one lump sum.
   • Best for: Borrowers planning to sell or refinance before the balloon payment is due.

Variable-Rate Mortgages (VRMs)

Variable-rate mortgages have interest rates that fluctuate based on an index. Payments may vary over the loan term. Common types include:

1. Adjustable-Rate Mortgage (ARM)

   • Features: The interest rate is fixed for an initial period (e.g., 3, 5, 7, or 10 years) and adjusts periodically thereafter.
   • Best for: Borrowers planning to sell or refinance before rate adjustments.

2. Interest-Only ARM

   • Features: Interest-only payments during the initial fixed period of the ARM.
   • Best for: Borrowers with short-term needs or irregular income.

3. Hybrid ARM

   • Features: Combines features of fixed and adjustable mortgages (e.g., a 5/1 ARM has a 5-year fixed rate, adjusting annually thereafter).
   • Best for: Borrowers who expect to move or refinance within the fixed-rate period.

4. Payment-Option ARM

   • Features: Offers multiple payment options, such as interest-only or a minimum payment (which may lead to negative amortization).
   • Best for: Borrowers with flexible financial strategies, though this can be risky.

Key Differences