Fixed Rate Mortgage - If you’re going to be staying in your home for at least 7 years, consider a fixed rate. This loan’s interest rate is fixed for the life of the loan or term – 15, 20 or 30 years. Usually the shorter the term, the lower the interest rate. This type of loan is amortized – both the principle and the interest are paid off at the end of the loan term.
Adjustable Rate Mortgage - If your only planning on living in your home for a short period of time you may want to consider an adjustable rate. Your interest rate can adjust – up or down. The rate is tied to an index like treasury bills or prime rates. The initial rate usually starts out low, but can adjust after a set period of time. If you choose this type of loan and then decide to stay in your home, you may want to refinance after two years to avoid any upward rate adjustments.
Combination Fixed and Adjustable - Going to be in your house for just a few years? This type of home mortgage loan can start out as a fixed rate for a set number of years, keeping your rate and payments low, and then the loan adjusts. Like the adjustable rate, the amount of the adjustment is tied to an index that can go up or down. This loan is sometimes called a two-step or convertible ARM. Just remember, these loans usually go up after a set period of time, or if you have to convert after a few years it can cost you money. Be sure you understand your loan and when your payments could go up to avoid paying more than you have to.
Balloon - An interest only loan. You would only want to use this loan if you were only staying for a short time in your home. Because you’re only paying interest, and nothing towards the principle, you don’t build any equity. At the end of the loan term, you have to pay the balance off all at once, but few people ever keep these loans for the entire term.
Having an understanding of these basic types of loans and combinations of them is the key to finding the mortgage loan that is right for you.
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