Fixed Rate Loans
These loans are fixed for either a 10, 15, 20, 30 or now even 40 year period. They are amortized over the period of time you select, so the shorter the period the larger the monthly payment will be. Also, the shorter the time period you select the more significant the interest savings will be over the term of the loan. But one note of caution is that you should make sure that you are comfortable with whatever period you select, i.e. if you select a 15 year fixed you can’t go back to a 30 year later if let’s say you loose your job. Generally there is a slightly better interest rate offered for the shorter term loans.
Adjustable Rate Loans
Adjustable Rate Mortgages, or ARM’s, differ from fixed rate mortgages in that the interest rate and monthly payment move up (or down) as market interest rates change.
Most Adjustable Rate Mortgages have an initial period where the interest rate is fixed, followed by a much longer period during which the rate changes at preset intervals. The rates charged during the initial periods are generally lower than the rates found on comparable fixed rate mortgages. The initial fixed rate period can be as short as a month or as long as 10 years. Five-year ARM’s are the most common, though the so-called hybrid Adjustable Rate Mortgage has become popular in recent years.
These hybrid Adjustable Rate Mortgages — sometimes referred to as 3/1, 5/1, 7/1 or 10/1 loans — have fixed rates for the first three, five, seven or 10 years, followed by rates that adjust annually thereafter. After the fixed rate honeymoon, an adjustable rate mortgage fluctuates at the same rate as an index spelled out in closing documents. The lender finds out what the index value is, adds a margin to that figure, then recalculates what the borrower’s new rate and payment will be. The process repeats each time an adjustment date rolls around.