Adjustable Rate Mortgage (ARM)- This type of loan usually start with a really low rate. After a certain amount of time, the interest rates can change with market conditions. This type of loan may be an advantage to someone who will not live at a property for more than a couple years. However, the unpredictability of this loan is a big downside.
FHA- These loans are especially popular with first-time home buyers. These loans only require a 3.5% down payment, and are easier to qualify for than conventional loans. This type of loan makes it easier for people to own homes, but it is limited to only primary residences. This type of loan was developed to help low and moderate income families become home owners, so there are income caps in order to qualify.
VA- Only available to honorably discharged veterans and active duty military. To those who qualify, they can get a home loan with zero down payment, without having to pay higher interest rates.
Balloon- These loans usually have lower interest rates, which may allow a buyer to qualify for a higher loan amount. After a certain period of time (typically 5-7 years), the balloon payment is due and the loan must be completely paid off or refinanced. These types of loans are risky because if someone runs into financial trouble, they may not be able to refinance or pay off the loan. In this case, the home owner would be forced to sell the property in order to cover the balloon payment.
Originally Posted by Lisa VanderLoo 1/25/11