There are two basic types of mortgage loans to choose from:
Fixed Rate Mortgages
- These loans are the most popular since the interest rate and payment are fixed for the entire term of the loan. These loans can have a term of 30, 25, 20, 15 or 10 years.
Adjustable Rate Mortgages (ARMs)
- These are 30-year loans which generally are available at a lower rate than a 30-year Fixed Rate loan. The initial interest rate is fixed for a specific time period - usually for 10, 7, 5, or 3 years and the interest rate adjusts each year thereafter. These ARMs are referred to as 10/1, 7/1, 5/1 and 3/1 ARMs. After the initial fixed period, the interest rate adjusts, to the lower of:
With each subsequent year, the interest rate will adjust to the lower of:
- the 1-Year LIBOR Index plus 2.25%, or
- the initial rate plus 5% (2% for a 3/1 ARM).
After each adjustment, the new payment is calculated each year by amortizing the loan balance using the adjusted rate over the remaining term of the loan.
- the 1-Year LIBOR Index plus 2.25%
- the previous year rate plus 2%, or
- the initial rate plus 5% (6% for a 3/1 ARM)
Interest Only Loans
- These are loans where a traditional 30-Year Fixed Rate loan, or a 10/1, 7/1, 5/1, or 3/1 ARM is combined with an initial 10-Year Interest Only period during which no principal payment is required. After 10 years, the loan balance is amortized over the remaining 20 years at the fixed rate in the case of a 30-Year Fixed Rate loan, or at the adjusted rate on an ARM.
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