Consumer Guide to the Most Popular Mortgage Loans

It can be rather difficult to buy a house in regards to looking for the best suitable house, determining how you are going to pay for it, and calculating how much it will cost you in reality.  However, it is important to realize that there are a lot of various mortgage alternatives for homebuyers to consider. The purpose of these alternatives is to allow you to find precisely the loan that will match your requirements and abilities. Below you can find a list of most popular mortgage loan options to choose from.

FRM (fixed rate mortgage)

This is the loan of choice in nearly 70% of home purchase transactions. The main reason for their popularity among many consumers is stability. The interest rate of this loan remains the same throughout the term of the loan, regardless of changes in the prevailing market rate. This allows the consumer to rely upon a stable monthly payment on the principle and interest throughout the term of the loan, whether it spans 30 years or 15.

ARM (adjustable rate mortgages)

These loans have an interest rate that is tied to an index, changing with prevailing market rates. Generally, certain intervals at which the interest rates are adjusted are specified in the loan contract. If the prevailing market rate has increased from one adjustment period to the next, the monthly loan payments will rise. If interest rates have fallen, so will the consumer’s payment. Often, there are caps placed on the amount that the rate can change during each adjustment period, and some carry a lifetime cap, limiting the amount rates can be increased over the term of the loan.

This kind of mortgage loans can be divided into subgroups:

One Year Adjustable Rate Mortgage

With the one year ARM, the interest rate changes every year according to the index for the entire life of the loan. This can be good for the home buyer who wants to risk getting the lowest rate possible at the expense of risking a higher rate and higher monthly payments if the index changes accordingly.

10/1 Year ARM

With this mortgage, the interest rate remains the same for 10 years and then starting the 11th year changes every year according to the index the lender chooses to base the interest on. This mortgage is good for those who may move in 10 years and want to enjoy a stable payment plan while they are living in the home.

Balloon Mortgage

Balloon mortgages are considered a little higher risk because at the end of the life of the loan, there can be a large payment as the loan is due in full. The life of the loan is negotiable; however 3, 5, and 7 year balloons are common. The homeowner will pay at a stable interest rate for the life of the loan, then at the end of the term, all the remainder of the loan must be paid in full. The homeowner must be prepared for this final, possibly very large payment.

30 Due in 7 Mortgage

This mortgage is like two fixed rate mortgages put together. It is also known as a 7/23 two-step mortgage. The interest rate and monthly payment remains stable for 7 years and then on the 8th year, the interest rate changes according to the current rates. This interest rate and payment will remain the same for the life of the loan. This mortgage is good for those who plan to live in the home for more than 10 years and wants to risk the interest rate going either higher or lower at the 8 year mark.

30 Due in 5

Similar to the 30 due in 7, this mortgage is a two-step mortgage that has an interest rate and monthly payment that remains stable for 5 years and then changes according to the current market rates on the 6th year. This mortgage is good for those who wish to live in the home for longer than 5 years and want to risk having a change in a monthly payment, whether an increase or decrease.

5/5 and 3/3 ARMs

These mortgages have a stable payment for the first listed number, 3, 5, or however negotiated, and then after that period the interest rate changes according to the market every 5 years for the 5/5 ARM and 3 years for the 3/3 ARM. This mortgage has fewer adjustments for the life of the loan and is good for those who which to live in the home for a period of 3-5 years and who are open to changes in the future.

5/1 and 3/1 ARMs

This mortgage is not stable and the interest rate changes every year after the first listed number. So starting the 6th year for the 5/1 ARM and starting the 4th year for the 3/1 ARM. This is good for the home owner who wishes to live in the property for the stable payment length of the loan and who is willing to risk getting the lowest rate possible after a time of stability.

Interest Only Mortgages

Interest only mortgages are loans that allow the borrower to pay only the interest on the loan for a predetermined period of time. The principle of the loan is not paid down during this period at all, leaving the homeowner a lower monthly payment to meet over the short term. However, once this initial interest only period expires the payments increase to include repayment of the principle and are steeper than a standard loan, as the principle must be paid over a shorter time period. The longer the interest only period, the higher the payments will rise after its expiration.

Option ARMs

Also referred to as flexible payment ARMs, Option adjustable rate loans have an interest rate that adjusts every month with no adjustment caps. These loans allow borrowers to make very low mortgage payments initially, but these monthly payments will rise over time, often quite steeply.

Not all mortgage loans are created equal and if you are looking to find the best mortgage loan product for your real estate transaction, knowing what is out there is just as important as weighing your options between different lenders. Even though these loans are usually written up and presented as completed products at the lending institution, remember that with good to great credit all terms are negotiable and you might be able to swing a further reduction here or there - if you ask.