The subject of mortgages can be bewildering for many people, especially first time homebuyers. More often than not, the confusion surrounding mortgages can actually be quite damaging and can lead to the homebuyer making a bad decision which can affect them for years to come. In order to shed some light on mortgages and their types, here is a quick reference guide.

Fixed Rate Mortgages

These are the mortgages that most people think of when buying a home. Fixed rate mortgages can have a term that generally ranges from 10 to 30 years, most of which are either 15 or 30 years. Though there are now plenty of other mortgage options available now, the 30 year fixed rate mortgage is often the safest mortgage option available because your payment is relatively low and your rate cannot be raised unexpectedly.

15 year fixed rate mortgages have higher payments than their 30 year counterparts, but generally are offered at a lower interest rate. Additionally, homebuyers that pay on their loan at this rate will reap the benefits of paying their interest down quickly in the form of quicker, higher equity.

Some lenders also offer biweekly mortgages which require payment every two weeks. Paying your mortgage every two weeks can effectively shorten a 30 year mortgage to about 19 years and increases the total annual amount paid by about 8%.

Adjustable Rate Mortgages

Adjustable rate mortgages (ARMs) have exploded in popularity in the last 10 years because they allow many people to buy a home when they wouldn't be able to with more traditional fixed rate mortgages. Adjustable rate mortgages can also be volatile, since interest rates and payments can increase irregularly after a grace period.

Adjustable rate mortgages have four components which need to be assessed by the potential homebuyer:

• Margin: This is usually 1.5 to 2.5 percent and is the amount that the lender adds to the index to make the adjusted rate.
• Index: This is the variable that the lender uses to measure the difference between the profits they are making on home loans as opposed to other investments.
• Adjustment Interval: This is the time between changes in the interest rate.
• Initial interest rate: This is usually very low; typically between one and three points below most advertised fixed rate mortgages.

Changing Mortgages

Lender Buydown: This is when the homeowner initially receives a discounted rate which gradually increases to a previously-agreed upon fixed rate after three years.

Two-step; Premier; Super seven mortgages: This is when the homeowner receives a fixed rate for seven to ten years and then the rate is adjusted to current market conditions.

Convertible mortgages: This is a loan which offers the homebuyer the option of negotiating a change in the loan's interest rate after a period of time.

Government Loans

FHA Loans: Administered by the Federal Housing Administration (FHA) and Housing and Urban Development (HUD). They generally have lower down payment requirements and may be easier for homebuyers to qualify for.

VA Loans: These are guaranteed by the Department of Veteran's Affairs and allow veterans to receive favorable loan terms without a down payment. These are also easier to qualify for than more conventional financing options. The VA does not grant the loans, it only guarantees them to the lender.