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Types of Loans
Thirty-Year Fixed Rate Mortgage
Fifteen-Year Fixed Rate Mortgage
Adjustable Rate Mortgages (ARM)
Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
2/1 Buydown Mortgage
Annual ARM Top of Page
Monthly ARM
Negative Amortization (Neg. Am) Loan
| | 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 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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| | 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 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. | |
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| | With an adjustable rate mortgage, the interest rate changes periodically, and payments may go up or down, in relation to an index.
Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. You might qualify for a larger loan because lenders sometimes decide the loan on the basis of your current income and the first year's payments. If interest rates remain steady or move lower, an ARM could be less expensive over a long period than a fixed-rate mortgage.
However, you take the risk that interest rates will increase and your monthly payments will increase as well.
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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| | 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 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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| | The 2/1 Buydown Mortgage allows you to qualify at below market rates so you 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 your average interest rate in line with the original market conditions. | |
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| | This loan has a rate that is recalculated once a year. | |
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| | 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 committing to a rate for only a month at a time, so his vulnerability is significantly reduced. | |
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| | 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 you to make monthly payments that are less than the accruing interest. Therefore, if you choose 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 its flexibility. You can choose between making the full loan payment, or the minimum payment, or any amount in between. If your income varies throughout the year (due to commissions, bonuses, etc.), you can make a lower payment during the "lean times", and then make higher payments when funds are readily available. | |
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