Mortgage - Types Of Mortgages

Fixed Rate Mortgages are the most common type of home loans. These mortgages are paid by fixed monthly payments of principal and interest for a pre-determined term. The interest rate stays the same over the life of the mortgage. The length of a fixed rate mortgage varies from lender to lender, however the most common ones are balloon,10, 15, 20 or 30 years. The 30 year mortgage is by far the most popular, mainly because it has the lowest payment since it spread out over a longer term. Fixed rate mortgages are also popular amoung buyers that plan on staying in the home for a long time. When choosing the length of the mortgage think in terms of what is best for you. While you will be able to pay off a 10 year mortgage quicker a 30 year mortgage may be more manageable.

Adjustable Rate Mortgages, usually refered to as ARM's, are similar to the fixed rate mortgage, in terms of the repayment. However the main difference is that the interest rate changes along with an index rate. These mortgages are usually amortized for 30 year, although this can be negotiated. An ARM, interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly. Lenders charge lower initial interest rates for ARMs than for fixed rate mortgages. This makes the ARM easier to qualify for and also means that you might qualify for a larger loan because the lender decision is usually based of your current income and the first year's payments. Also, an ARM could be less expensive than a fixed rate mortgagef if interest rates remain steady or moves lower, but remember interest rates can increase.

Also remember that most mortgages do not have pre-payment penalties so you can get a 30 year loan with the lower payment and make larger payments to pay it off earlier. However check with your lender to be sure they do not have a pre-payment penalty

With most ARMs, the interest rate and monthly payment change every 1, 3 or 5 years. However, some ARMs have more frequent changes. The period between one rate change and the next is called the adjustment period. So, a loan with an adjustment period of one year is called a one-year ARM, and the interest rate can change once every year. Most lenders tie ARM interest rate changes to changes in an index rate. These indexes go up and down with the general movement of interest rates. If the index rate moves up, your mortgage rate goes up if the index rate goes down your monthly payment goes down.
Lenders base ARM rates on a variety of indexes. Among the most common are the rates on one, three, or five year treasury securities. Another common index is the national or regional average cost of funds to savings and loan associations. When getting an ARM be sure to ask the lender which index they use to adjust the interest rate.