When you’re buying a home, knowing how to distinguish between different types of mortgages is extremely important. For one thing, knowledge of different mortgage products can help you navigate the sometimes-confusing home closing process. But the real reason you need to be familiar with the types of mortgages is because this information can save you a lot of money – possibly thousands of dollars! This guide to the most common types of mortgages will help you make sound choices when you’re applying for a home loan.

Basic mortgage types
If you want to learn how to distinguish between different types of mortgages, the first thing you need to know is that there are two basic types: fixed rate and adjustable rate mortgages.

Fixed rate mortgages are the most common type of mortgage in the United States. This type of loan is the most popular because it offers stability. With a fixed rate loan, the borrower locks in an interest rate, and this rate remains the same for the entire life of the loan. That means that whether the loan is for 15 years or 30 years, a person with a fixed rate mortgage is required to make the same payment amount each month. (Your loan might allow you to pay more, but the required monthly payment remains the same.)

Payments on an adjustable rate mortgage, however, can change. That’s because adjustable rate mortgages (commonly called ARMs) are tied to current interest rates, which change periodically. Since the interest rate changes, payments on an adjustable rate mortgage can go up or down accordingly.

ARMs and fixed rate loans are just the beginning when it comes to distinguishing between mortgage types. There are many variations on fixed rate and adjustable rate mortgages. In the rest of this guide, we’ll learn the differences between common mortgage products.

FHA loans
FHA stands for Federal Housing Administration, meaning that FHA loans are government guaranteed. FHA loans are fixed rate loans designed to help average Americans become homeowners, so they are geared towards first-time home buyers or buyers with lower incomes. These loans are easier to qualify for, usually requiring as little as a three-percent down payment. The interest rate on an FHA loan is typically also lower than the interest rate on a fixed-rate loan you might get from a bank.

Balloon mortgages
Balloon mortgages are similar to thirty-year fixed rate mortgages in one sense. During the first few years of a balloon mortgage (usually a term of five to seven years), a borrower makes fixed rate payments. But when that initial term is up, the entire outstanding balance of a balloon mortgage must be paid — either out of pocket or through refinancing.

Interest only
Interest only mortgages allow the borrower to pay on the interest portion of a loan for a short, predetermined period of time. Since the monthly payments do not include principal, payments are very low. But when this introductory period expires, payments increase to include principal — and the lender requires principal to be repaid much faster than with a traditional loan. After the intro period, payments on interest only mortgages are typically very high.

Reverse mortgage
Reverse mortgages are very popular among older Americans. However, it is important to note that reverse mortgages are not true mortgages. They are really home equity loans. A reverse mortgage is a special type of loan that lets a person convert a portion of the equity in his home into cash. With this loan, the equity that he’s built up over the years of paying his mortgage gets paid back to him. Reverse mortgages are only for homeowners — people who have already paid off a mortgage or owe very little — aged 62 years and older.

More types of mortgages
The mortgage types we’ve covered in this article are just a few of the most common and basic types. Be aware that a wide range of loan products exists to accommodate many different budgets and lifestyles.