There are many forms of loans available. You want to look at the types of loans available, not just the going
rates. The below gives you a brief description on types of loans available, be sure to ask your broker for further
details and comparisons.
Fixed Rate Home Loans
Fixed rate loans are loans ideal for those looking to lock in a rate. This type of loan will have the same interest
rate for the entire life of the loan. There are a variety of repayment terms, with 15, 20, and 30 years as the
Fixed Rate Loans are ideal for people who want the current rate and want to keep it for the life of the loan.
They are ideal for homeowners who plan to stay in the home for a long time and do not plan on moving soon.
The person, who is more comfortable with certainty and a clearly set path, will find great comfort in the Fixed
The 30-Year Fixed Rate Home Loan will have the lowest monthly payment of the fixed rate loan choices. This
keeps home loan payments affordable by extending them over a longer period of time. Most of the time, you
will find that this solution offers the maximum tax-deductible interest, but always check with your account first.
The 15-Year Fixed Rate Home Loan comes with higher payments than the 30-year loan but a lower rate. Over
the life of the loan, you will save considerable money on total interest paid. The shorter timeframe allows you
to build equity in your home faster.
Adjustable-Rate Mortgages (ARMs)
Adjustable Rate Mortgages are mortgages where the interest rate adjusts from time to time. The interest rate
you pay is adjusted to keep it in line with changing market rates. When interest rates rise, your monthly home
loan payments may go up. The reverse occurs when interest rates go down: your monthly home loan
payments may go down.
ARMs are attractive because they offer start rates that are lower than the interest rates of fixed rate home
loans. This typically enables you to begin with lower monthly payments and qualify for a larger loan.
Typically people will go with the ARMs if they are planning to sell the home in a few years and are less
concerned about possible rate increases. They may also be confident that their income will raise enough in
the coming years to handle any increase in payments. As a result, they like that a lower initial rate is offered
and this enables them to afford the home they want.
The mechanics of an ARMs works like this. The initial interest rate, which tends to be lower than most current
rates, allows for a low month payment for a set amount of time, for example 5 years. After this rate comes to
an end, the interest rate is based on the performance of a financial index. For example: the average interest
rate or yield on Treasury bills. Your payment schedule is adjusted according to the index, just as your rate and
payment increases at each adjustment depends on your loan terms. A 1-year ARM adjusts once a year. At
each adjustment, the new rate is computed by adding the margin (a predetermined amount that remains the
same for the life of your loan) to the predefined financial index. Two “caps” may put a limit on the maximum
amount your rate can increase. The periodic cap sets the maximum rate to which your rate can go up from one
adjustment period to the next. The life cap sets the maximum interest rate for the life of the loan. Some ARMs
offer a conversion feature that allows you to convert to a fixed rate loan at certain times during your loan.
Fixed period ARMs
Does this type of vulnerability or fluctuation give you a sour stomach? A fixed period ARM starts with a lower
rate than standard fixed rate loans. Your rate then stays the same for the first 3, 5, 7, or 10 years, depending on the fixed period ARM you choose. At the end of that period, your interest rate adjusts like a regular ARM
according to a financial index (that’s why some lenders call them 3/1, 5/1, 7/1 and 10/1 ARMs).
The fixed period ARMs are good for people who plan on living at the home for a short period of time and know
they will sell shortly.
Similar to Fixed Period ARM loans, with a Balloon Loan your rate stays the same for the first 5, or 7 years,
depending on the type of Balloon mortgage you choose. With a Balloon mortgage your monthly payment is
calculated as if you will pay off the loan over 30 years. However, this type of loan requires that you completely
pay your remaining balance (a significant percentage of your original loan amount) in a single payment after 5
or 7 years.
This loan may be suitable for those who will sell their home or refinance on or before the balloon payment
date. This loan could be suitable for temporarily relocated workers or others who are certain they will not stay
in their new home beyond the 5 or 7-year period.
Borrowers often enjoy a lower interest rate for this program because the borrower is not obliging the lender to
extend credit beyond the initial fixed period. Please note that some balloon programs offer the borrower a
Conditional Right to Reset, which effectively provide an extension beyond the initial fixed period.
The Federal Housing Administration (FHA) and the U.S. Department of Veterans Affairs (VA) offer
government-insured loans. These loans enable first-time homebuyers to obtain loans more easily. The loans
consist of low down payments and flexible lending guidelines.
FHA Loan Features
The FHA loan has numerous features. Instead of the common 20% down payment, the FHA loan allows for a
3% down payment of the FHA appraisal value or purchase price, the lower of the two. There are no maximum
income or earning limitations and both fixed rate and ARM loans are offered. Insurance from the federal
government replaces private mortgage insurance.
VA Loan Features
The VA loan has its own desirable features. These include the ability for qualified veterans to get a loan up to
$203,000, with no down payment, on fixed rate loans only. They have more flexible qualification guidelines
than FHA or conventional loans.
Jumbo Loans (Loans over $417,000)
Loans that exceed $417,000 are called jumbo or non-conforming loans. They exceed the loan amounts
allowed by Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan
Mortgage Corporation). These are two government-sponsored enterprises that help facilitate the availability of
home loans by investing throughout the country.
Non-conforming loans typically have a higher rate and different requirements for your down payment.