Fixed Rate loans offer consumers the stability and comfort of having an interest rate which will never change. Having the security of knowing each and every month what your mortgage payment will be makes planning future investments possible. Consumers are able to choose from different types of fixed terms. The following are common terms of fixed rate loans:
30 year Fixed - 25 year Fixed - 20 year Fixed - 15 year Fixed - 10 year Fixed
Adjustable rate loans are those loans where the initial interest rates are fixed for a short period of time. These loans usually have lower start rates than those of fixed rates and balloon mortgages. The lower start rate allows consumers to accomplish different things. It usually allows the consumers to qualify for more loan, and to have lower monthly payments for the first years they own the home. Adjustable rate mortgages offer fixed terms usually of 1, 2, 3, 5, 7, 10 years. For example, a 5 year ARM would be fixed for five years before the interest rate can adjust. A 3 year arm is fixed for three years before the interest rate can adjust. Some important factors to be aware of when choosing an adjustable rate mortgage are the following:
- Adjustment Period: is the period until which the interest rate can adjust. (1, 2, 3, 5, 7, 10)
- Caps: limit the amount which the interest rate can adjust per year after its initial term. The most common caps are 2/6. The interest rate could adjust 2 percent per year but not more than 6 percent over the life of the loan.
- Index & Margin: are the factors that decide what the interest rate will adjust to. The margin is a constant that will never change. The margin is added to the index. The index is an economic indicator that can go up or down. This index generally follows the market. Commonly used are the 1 year T-bill, LIBOR, and the cost of funds indices.
- Convertibility: Point at which loan can be converted to fixed rate.
Although adjustable rate mortgages are very beneficial and can save consumers thousands of dollars, the most important thing is to understand your adjustable and how it works.
Balloon Mortgage loans are usually amortized over a 30 year term. Interest rates on these types of loans are generally less than that of a 30 year Fixed, although they are only fixed for 5 or 7 years. On a 5 year balloon the interest rate would be fixed for the first 60 months. On the 61st month this loan would balloon out. This would require you to refinance into another mortgage program or payoff the mortgage balance.