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.
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, 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.
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1, 7/1, or 10/1—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 then-current rates for the remaining
25 years (adjusting annually thereafter). 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.
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.
Interest Only Mortgages
A loan in which for a set term the borrower pays only the interest on the principal
balance, with the principal balance unchanged. At the end of the interest-only term
the borrower may pay the principal or convert the loan to a principal and interest
Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful -- and the most misunderstood
mortgage 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 of this loan
lies in the borrower's ability to choose between making the full loan payment, or
the minimum payment, or any amount in between. If a borrower's income varies throughout
the year (due to commissions, bonuses, etc.), the borrower can make a lower payment
during the "lean times", and then make higher payments when funds are readily available.