Types of Loans
- Thirty-Year Fixed Rate Mortgage
- The traditional 30-year fixed-rate mortgage
has a constant interest rate and monthly payments that never change.
This may be a good choice if you plan to stay in your home
for seven years or longer.
If you plan to move within seven years,
then adjustable-rate loans are usually cheaper.
As a rule of thumb, it may be harder to qualify
for fixed-rate loans than for adjustable rate loans.
When interest rates are low,
fixed-rate loans are generally not that much more expensive
than adjustable-rate mortgages and may be a better deal in the long run,
because you can lock in the rate for the life of your loan.
- Fifteen-Year Fixed Rate Mortgage
- This loan is fully amortized over a 15-year period
and features constant monthly payments.
It offers all the advantages of the 30-year loan,
plus a lower interest rate —
and you'll own your home twice as fast.
The disadvantage is that, with a 15-year loan,
you commit to a higher monthly payment.
Many borrowers opt for a 30-year fixed-rate loan
and voluntarily make larger payments
that will pay off their loan in 15 years.
This approach is often safer than committing to a higher monthly payment,
since the difference in interest rates isn't that great.
- Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
- These ARMS — also called 3/1, 5/1 or 7/1 —
can offer the best of both worlds:
lower interest rates (like ARMs) and a fixed payment
for a longer period of time than most adjustable rate loans.
For example, a "5/1 loan" has a fixed monthly payment
and interest for the first five years
and then turns into a traditional adjustable-rate loan,
based on the index plus margin at the time of locking in the rate.
All adjustable rate loans have a floor rate
and a lifetime cap/ceiling rate
for the remaining term of the adjustable rate loan.
It's a good choice for people who expect to move (or refinance)
before or shortly after the adjustment occurs.
- Adjustable Rate Mortgages (ARM)
- When it comes to ARMs there's a basic rule to remember…
the longer you ask the lender to charge you a specific rate,
the more expensive the loan.
- Annual ARM
- This loan has a rate that is recalculated once a year.
- Monthly ARM
- With this loan, the interest rate is recalculated every month.
Compared to other options, the rate is usually lower on this ARM
because the lender is only committing to a rate for a month at a time,
so his vulnerability is significantly reduced.