What Are The Basic Loan Types?

The past several years have seen an explosion in loan products designed to meet almost every borrowers individual criteria. These many mortgage products fall under a few basic loan types.

15-Year and 30-Year Fixed Rate Payment and rate stay the same from start to finish

5 and 7 Year Balloons  Lower start rate. Some of the balloon programs may be converted to an adjustable rate or a fixed rate after the 5 or 7 years, with very low fee and attractive rate. 

Adjustable Rate Mortgage (ARM)  Lowest start rate Adjusts either every 6 months or every 12 months depending on program and grade and is based on the economy  6% ceiling for prime and 7% ceiling for sub-prime. 

5/1 and 7/1 Fixed Rate Rate is fixed for the first 5 or 7 years, then shifts to an adjustable rate mortgage (ARM).

2/28 and 3/27 ARM  An ARM program that is fixed for the first 2 or 3 years, then shifts into a 6 month adjustable rate mortgage. It is a sub-prime program giving you a rate lower than the sub-prime 30-year fixed, and if you have had credit problems, it allows a window of time for credit rebuilding and seasoning. You will then want to refinance this loan.

What Should I Look For?

Are You Moving in the First Few Years? You may want to consider a balloon mortgage. Some balloon loans allow you to convert to a longer term if you find the 5 or 7 years was not enough time. Conversions are easy and reasonable. When you consider this loan, ask if the program is convertible.

Do You Need the Lowest Possible Rate to Qualify? To qualify for the house you want, an adjustable rate or a 7-year balloon may be the answer.

Do You Want a Fixed Predictable Loan? If you want a fixed predictable loan for a long time, the 15-year or 30-year fixed is probably the best, especially when you have good credit.

Which Program Is Best For Me?

TRADITIONAL FIFTEEN TO THIRTY YEAR FIXED-RATE LOANS
 

Advantages

Maximum Interest Deduction for Taxes, sometimes easier to qualify, stable predictable payments, high loan to value, lower down payment, possible secondary financing if needed
 

Disadvantage

Pay More Interest Over Life of Loan, higher starting interest rate, Lower debt ratio (Larger Income to qualify) Higher monthly payment

3 - 5 - 7 FIXED SWITCHING TO ADJUSTABLE MORTGAGE
 

Advantages

No Rate Change in First Years Lower Starting Fixed Rates If You Plan to Sell Within 3 - 7 Years Allows Budget Planning Can Give You Time to Repair Credit

Disadvantage

Rate Increases after Fixed Term Possible 6% Lifetime Rate Increase Builds Equity Slower Loses Advantage After First Fixed Period Fixed rates change to  adjustable rate
 

ADJUSTABLE MORTGAGE (ARM)
 

Advantages

Lowest Starting Interest Rates
Help Qualify For Higher Loan Amounts
If You Plan to Sell Within 2-3 Years
If You Expect Your Income to Increase
 

Disadvantage

Periodic Payment and Rate Increases
Possible 6% Lifetime Rate Increase
Builds Equity Slower
Payment Increases May Affect Budget

5 - 7 YEAR BALLOON MORTGAGE
 

Advantages

Lower Starting Rate than 30 Year Fixed
Great for Refinancing From a Higher Rate Use when you plan a move in 5-7 years Some are convertible to 30-yr fixed or a treasury ARM, low fees, good rates

Disadvantage

Loan Balance Due can Change Long Term Financial Planning
If You Plan to Live There Over 7 Years