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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, adjustable rate loans are usually cheaper. As a rule
of thumb, fixed rate loans may also be harder to qualify for than
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.
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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 is often a safer approach than committing to a higher
monthly payment, since the interest rate difference isn't that great.
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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. A 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 then-current 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.
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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.
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2/1 Buy Down Mortgage
The 2/1 Buy Down 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 long term rates, however even keeping the loan in place for three
full years or more will keep their average interest rate in line with
the original market conditions.
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Annual ARM
This loan has a rate that is recalculated once a year.
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Monthly ARM
With this loan the interest rate is recalculated every month. The rate
is usually lower on this ARM compared to others because the lender is
only committing to a rate for a month at a time so his vulnerability is
significantly reduced.
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Negative Amortization (Neg.
Am) Loan
This is a deferred interest loan that is very powerful and the most
misunderstood program because of its many options. Basically, the lender
allows the borrower to make monthly payments that are less than the
accruing interest. Therefore, if the borrower chooses to make the
minimum monthly payment, the loan balance will increase by the amount of
interest not paid on the loan.
The power is in the borrower's ability to choose either making the
full loan payment, the minimum payment, or any amount in between. If a
borrower's income varies throughout the year (commissions, bonuses,
etc.), the borrower can make the lesser payment during the "lean
times", and make the higher payment when funds are readily
available.
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