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TYPES OF MORTGAGES

Fixed rate

A fixed rate mortgage is one which the interest rate and payment are locked for the duration of the loan.  The loans can vary in length from 15 and 30 years.  The 15 year fixed rate provides the lowest total cost for the borrower.  The payment is comprised of principle and interest.  The payment will be the largest of all the payment options because it includes the largest amount of principle being paid off in the shortest period of time.   The 30 year fixed rate is the second lowest in total cost for the borrower.  The payment is comprised of principle and interest.


Fixed rate loans are considered to be safe and low risk because the rate, payment, and total cost are locked.  The homeowner can shrink the overall cost of the mortgage by paying more than just the required monthly amount.   


Adjustable rate

An adjustable rate mortgage is one which the interest resets after a certain period of time.  The time frames can vary depending on the type of loan a person selects.  Most popular are three, five and seven year adjustable rate mortgages, known as ARMs.  Other ARMs are available for different durations.  


If choosing an ARM, it’s important to decide how long you are going to own the property.  The rate on an ARM is locked only for the specific duration specified in the mortgage contract.  For example, if you have a three year ARM, the rate will reset in three years.  Depending on what current interest rates are vs where they could be in the future is something that needs to be considered.  Currently rates are low.  In three years if rates increase the interest rate on the ARM will increase.  The significance is a homeowner could experience payment shock, which is an increase in the monthly payment.  Generally the monthly payment on an ARM will be less than the monthly payment on a fixed rate mortgage.  That’s why these loans look attractive for homeowners that are focused on payment, rather than total cost.      


Option ARM loans

Some ARM loans come with different payment options.  There are interest only and partial interest payments.  


Interest only

An interest only loan allows the borrower to pay just the interest for a period of time.  The monthly payment will be less than an period certain ARM (3,5,or 7 years) or fixed rate mortgage.  An interest only loan is appealing for borrowers who are concerned about having a large monthly payment initially.


Negative Amortization

A Negative Amortization loan allows the borrower to make a partial interest only payment.  The monthly payment is the smallest out of all the loans, however after a period of time, the loan will reset and payment of principle and interest will be required.  The drawback to a negative amortization loan is it can erode a borrower’s equity because the equity is used to make up the portion of interest that wasn’t paid in the monthly payment.   

 

VA loan

A VA loan is a loan that is guaranteed by the U.S. Government Office of Veterans Affairs.  The loan was designed for veterans and their surviving spouses.  The loan allows 100% financing without having to pay Private Mortgage Insurance (PMI).  A VA loan also allows a veteran to qualify for a larger loan amount than a traditional loan.