Types of loans
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, particularly if you make a low down payment. 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 of default.

   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 down side, government loans limit the amount you can borrow, often take longer to process, and sometimes 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 adjustments for taxes and insurance.

   Adjustable rate mortgages go by a variety of names, but basically these loans have interest rates or monthly payments that can go up or down over time. 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, and people who might not have much cash for down payment and closing costs.

   If you consider an adjustable rate mortgage, ask the lender to explain the terms fully. Ask about the interest rate cap; the maximum rate you will be charged no matter how high rates go in the market. Don't confuse rate cap with payment cap. When the payment is not enough to cover interest, the excess interest is added to your principal balance, so your debt increases instead of decreases. Also ask about the index that will be used to calculate future interest rates and how index charges 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.