Loan Types

Fixed Rate Loans
Fixed rate means that the interest rate and your monthly payment amount remain the same during the entire life of the loan. They won't change.

Potential benefits of this loan type:
No changes in interest or payment amount over the term of the loan even if the market shifts. A great choice if you're buying when interest rates are low, and/or you plan keep the property you're purchasing for a long time.
1. A 30-year fixed-rate loan maintains the same interest rate and monthly payment amount for 30 years or 360 months. At the end of this term, the total amount of the loan (interest + amount borrowed) is paid in full (unless you pay it off early).

2. A 15-year fixed-rate loan maintains the same interest rate and monthly payment amount for a total of 15 years or 180 months. At the end of this term, the total amount of the loan (interest + amount borrowed) is paid in full (unless you pay it off early).

Adjustable Rate Mortgages (ARMs) An adjustable rate mortgage (ARM) starts with a fixed interest rate and monthly payment amount for a specific period of time. When that time period ends, the interest rate and monthly payment change at regularly scheduled intervals until the loan ends. A 30-year or 360-month term is typical for ARMs.

The fixed rate period can be as short as 1 month or as long as 10 years. Typical intervals for changing the interest rate and monthly payment amount for ARMs are every month, every 6 months, or every 12 months. Each loan program specifies its own time periods for fixed rates and adjustment.

Caps are often used with ARMs to limit the amount that interest rates and monthly payment amounts can change at scheduled intervals. Caps help minimize borrower risk from extreme fluctuations.

Potential benefits of this loan type:
- Typically has a lower interest rate, which can help borrowers qualify for a larger loan amount.
- A good choice for buyers who plan to own the property for only 3 to 5 years. On average, most people move or refinance within 7 years of buying.

1-year ARM An ARM where the interest rate and monthly payment amount change once a year. These annual changes correspond to changes in the 1-year Treasury Bill (which would be defined as the loan's index) plus the percentage of profit the lender adds to the index to compute the loan's interest rate.

3-1 ARM This ARM type starts with a fixed rate period of 3 years. After that its interest rate and monthly payment change every 12 months.

5-1 ARM This ARM type starts with a fixed rate period of 5 years. After that its interest rate and monthly payment change every 12 months.

7-1 ARM This ARM type starts with a fixed rate period of 7 years. After that its interest rate and monthly payment change every 12 months.

10-1 ARM This ARM type starts with a fixed rate period of 10 years. After that its interest rate and monthly payment change every 12 months.

6-month LIBOR ARM An ARM
An ARM where the interest rate and monthly payment amount change every 6 months. The interest rate changes correspond to changes in the London Inter-Bank Offer Rate (LIBOR) and the percentage of profit the lender adds to the index to compute the loan's interest rate. LIBOR is a global loan rate index.

Balloon Loan
A mortgage loan with a fixed monthly payment that's based on a 30-year or 360-month term, but is paid off in a much shorter period of time. For example, the monthly payment for a 7-year balloon loan is calculated based on a 30-year term. After 7 years of making payments, there is still a significant loan balance left to pay (this is the balloon). The borrower must pay off the loan or refinances the amount of the balloon with another loan.

Potential benefits of this loan type:

May have a lower interest rate, which helps borrowers qualify for a larger loan amount.
Helps borrowers buy property now if they know they will inherit large amounts of money or cash-in stock options in the future (to pay off the balloon).