30-YEAR, FIXED-RATE MORTGAGE
The traditional 30-year, a 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 might be a better deal in the long run because you can lock in the rate for the life of your loan.
15-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 will 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 is not that great.
ADJUSTABLE-RATE MORTGAGES (ARM)
When it comes to ARMs there is a basic rule to remember: the longer you ask the lender to charge you a specific rate, the more expensive the loan is.
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 is a good choice for people who expect to move (or refinance) before or shortly after the adjustment occurs.
This loan has a rate that is recalculated once a year.
The interest rate is recalculated every month with this loan. 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.