Understanding Different Loan Types

Fixed Rate Loan:  These loans are designed for those with solid credit histories, relatively low debt, and who plan to remain in their homes for several years. Fixed-rate loan payments are predictable and stable since the interest rate is set for the full length, or term, of the loan. Using a fixed interest rate of 6 percent, a 30-year loan of $400,000, on a $500,000 home, with a down payment of 20 percent, will produce a monthly payment of $2,400.

Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it may be harder to qualify for fixed-rate loans than for adjustable rate loans. When interest rates are low, fixed-rate loans are generally not that much more expensive than adjustable-rate mortgages and may be a better deal in the long run, because you can lock in the rate for the life of your loan.

Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you'll own your home twice as fast. The disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years. This approach is often safer than committing to a higher monthly payment, since the difference in interest rates isn't that great.

Adjustable Rate Loan:  Also known as an ARM loan, these are typically offered at a lower initial interest rate than traditional fixed-rate loans, and can lower your monthly payments for a specified time, which can range from a few months to a few years. Your interest rate, however, will adjust at the end of the specified time period and will readjust periodically thereafter. Depending on market conditions, the rate could be higher or lower than your initial rate. A 30-year loan of $400,000 on a $500,000 home, with a down payment of 20 percent, at an adjustable rate of 5.5 percent for the first 12 months, will produce an initial monthly payment of $2,270.

Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS—also called 3/1, 5/1 or 7/1—can offer the best of both worlds: lower interest rates (like ARMs) and a fixed payment for a longer period of time than most adjustable rate loans. For example, a "5/1 loan" has a fixed monthly payment and interest for the first five years and then turns into a traditional adjustable-rate loan, based on then-current rates for the remaining 25 years. It's a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs. 

Annual ARM
This loan has a rate that is recalculated once a year.   Monthly ARM With this loan, the interest rate is recalculated every month. Compared to other options, the rate is usually lower on this ARM because the lender is only committing to a rate for a month at a time, so his vulnerability is significantly reduced.

Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful -- and the most misunderstood mortgage program because of its many options. Basically, the lender allows the borrower to make monthly payments that are less than the accruing interest. Therefore, if the borrower chooses to make the minimum monthly payment, the loan balance will increase by the amount of interest not paid on the loan. The power of this loan lies in the borrower's ability to choose between making the full loan payment, or the minimum payment, or any amount in between. If a borrower's income varies throughout the year (due to commissions, bonuses, etc.), the borrower can make a lower payment during the "lean times", and then make higher payments when funds are readily available.

Jumbo Loan
These loans are for buyers who need to borrow amounts greater than $417,000 for a single family home. Jumbo loans carry more risk and, in turn, often come with higher interest rates. A 30-year loan of $420,000 for a home priced at $525,000, with a down payment of 20 percent at a fixed interest rate of 6.7 percent, would produce a monthly payment of $2,710.

Loans for First Time Buyers
There are several programs available that offer loan assistance options for first-time-home buyers. FHA-Insured Loans, for example, are insured by the federal government against default, and are designed to help qualified borrowers who can’t afford the down payment required by certain lenders. FHA loans provide up to approximately 96.5% financing (meaning the buyer puts down 3.5%), but you may be required to cover other costs, such as mortgage insurance premiums, and you’ll need to meet certain credit qualifications. VA Loans are guaranteed by the U.S. Dept. of Veterans Affairs, and offer low- to no-down payment options for qualified first-time buyers who can provide proof of military service.

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