It's important to understand how different types of mortgages work when looking for great mortgage interest rates. Low rates aren't the only thing to look for--the terms of repayment can have an enormous effect on the overall value of home loans, so you should be sure to understand the basic types of mortgages before comparing rates.

Fixed Rate Mortgages

Fixed rate mortgages are popular because they're amortized, meaning that they're paid off at the end of their term with most of the loan's interest handled at the beginning of the mortgage. To put it simply, you'll know what you're getting with fixed mortgages rates and the loan will gradually decrease until it is completely paid off.

Fixed rate mortgages are probably the least complex and certainly the most popular type of mortgage available. Most lenders offer fixed home mortgage rates for 10, 15, 30 or even 40 year loans.

Although a buyer must make minimum mortgage payments each month with a fixed rate loan, it's also possible to pay extra to shorten the life of a loan and to reduce its cost. Fixed rate mortgages can also be refinanced for better rates or to borrow against a home's equity.

Adjustable Rate Mortgages

Many home lenders offer adjustable rate mortgage programs. These programs are somewhat controversial, as interest rates vary and can push up the monthly payments for borrowers. When used correctly, an adjustable rate mortgage can offer more flexibility than fixed rates, as homeowners only need to make minimum payments during some periods. This is especially true for a so-called "option However, this can result in negative amortization, which extends the life of a loan and leads to more costs for the borrower.

Adjustable rate mortgages also vary in length from 10-30 years on average. Rates can change frequently or infrequently depending on the mortgage agreement.

Many buyers are currently looking at mortgage refinancing options to convert adjustable rate loans to fixed rate loans, as fixed rate loans tend to be a better purchase during uncertain economic periods.


Government Programs For Lower Home Mortgage Rates

There are several government programs that provide assistance for homeowners who want to refinance but who don't meet a typical lender's criteria for refinancing, usually because a home loan is underwater (the value of the loan exceeds the value of the home). These programs can lower mortgage rates significantly, resulting in lower monthly payments.

However, homeowners must qualify for government home loan programs, which usually means a long, complex process with a lot of paperwork. Many homeowners won't qualify for the Making Homes Affordable programs, for instance, if their mortgage payments are less than 30% of their incomes.

New homeowners and veterans may benefit from government programs (especially from FHA loans) but for existing homeowners, loan assistance programs are often best used as a last resort, as they're hard to qualify for and may negatively impact a homeowner's credit.

Mortgage Refinancing Options

There are also special options for refinancing, including buydowns, in which the homeowner pays the lender to get a lower interest rate. Refinancing options generally work like standard home loans, but many mortgage companies have special options to help certain types of homeowners find lower rates.

There may be special mortgage programs available to help you buy a new home or refinance, but understanding the basic types of home loans will help you to use these programs more effectively and should allow for lower rates and a more informed decision.