Types of Loans
ThirtyYear Fixed Rate Mortgage
The traditional 30year fixedrate 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 adjustablerate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixedrate loans than for adjustable rate loans. When interest rates are low, fixedrate loans are generally not that much more expensive than adjustablerate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.
FifteenYear Fixed Rate Mortgage
This loan is fully amortized over a 15year period and features constant monthly payments. It offers all the advantages of the 30year loan, plus a lower
interest rate—and you’ll own your home twice as fast. The disadvantage is that, with a 15year loan, you commit to a higher monthly payment. Many
borrowers opt for a 30year fixedrate 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 increasingly popular 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 adjustablerate loan, based on thencurrent rates for the remaining 25 years. 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.
2/1 Buy Down Mortgage
The 2/1 BuyDown Mortgage allows the borrower to qualify at below market rates so they can borrow more. The initial starting interest rate increases
by 1% at the end of the first year and adjusts again by another 1% at the end of the second year. It then remains at a fixed interest rate for the
remainder of the loan term. Borrowers often refinance at the end of the second year to obtain the best longterm rates. However, keeping the loan in place even for three full years or more will keep their average interest rate in line with the original market conditions.
This loan has a rate that is recalculated once a year.
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.