Step 3: Selecting a mortgage type.

Today, there are literally hundreds of different loan programs. By meeting with a loan officer, you can determine the best type based on your individual financial situation. Make sure you understand all the issues, implications, and risks associated with each different option. Example of some common loan types:

• Fixed-rate mortgage:The interest rate (and thus principal and interest payments) remains fixed for the entire length of the loan. Two common lengths are fifteen and thirty years, although loans can be for virtually any time period up to forty years (the current maximum for most lenders). The longer the term, the more total interest you pay, but the lower the monthly mortgage payment.
• Adjustable-rate mortgage (ARM):A loan for which the interest rate (and thus payments) fluctuates over time. This is a dangerous loan if interest rates are rising or are projected to rise.
• Hybrid loan:An ARM in which the first adjustment period doesn't occur for an extended period of time (three, five, seven, and ten years are the most common). Each subsequent interest-rate adjustment usually occurs annually. This is sometimes referred to as an intermediate ARM.
• Interest-only loan:For a period of time, payments are only large enough to cover the interest due, with no money applied to reducing the principal. You still owe what you borrowed even after months/years of making payments.
• Jumbo loan:A loan that exceeds pre-established loan limits set by Fannie Mae and Freddie Mac. Interest rates for a jumbo loan are slightly higher than for conforming loans, since larger loan amounts increase the risk to lenders. Each year, the limits increase because of inflation; for 2005, any loan on a single-family unit that exceeded $359,650 was considered a jumbo loan.
• FHA (Federal Housing Administration) loan:A government-backed loan that allows for credit problems and higher debt ratios. Watch out for the higher-than-normal closing costs.
• VA/DVA (Veterans Administration) loan:A government-backed loan that allows veterans to purchase property with virtually no money down. It also allows for credit problems and higher debt ratios. Watch out for the higher-than-normal closing costs.
• Balloon loan:Also called a bullet loan, this typically has a fixed interest rate for a certain period of time; at a predetermined future point (five years is the most common time frame), the entire loan balance is due in full. At that time, complete repayment or refinancing is necessary, which makes this a risky loan since interest rates fluctuate and your job security/financial situation may have changed.