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.
1. Fixed Rate Mortgages – These mortgages are the staples of the lending industry and as the name itself shows, there is little variation in the terms. These loans are available for one, two or three decades and some lenders now even offer fixed rate loan products for four decades. If you are planning on staying in your home for more than 10 years and want to have a consistent loan payment that is not subject to market fluctuations, then this is the loan product for you.
2. 1 Year ARM – A one year adjustable rate mortgage, also known as ARM, offers a predictable, low interest rate for one year. Thereafter the market will dictate the interest rate, and more often than not it will adjust upward and increase the amount of money you spend on your monthly home loan payment. If you are staying in your property for more than one year it is wise to refinance at the end of the year.
3. 10/1 ARM – Another adjustable rate mortgage product, this loan will have a stable 10 years wherein the interest rate will not fluctuate but beginning in year 11, there will be a yearly review of the market and upward adjustments are common. This is a good loan for the consumer who will not stay in the home more than 10 years.
4. 7/1 ARM – This is a variation of the 10/1 ARM, but in this case the interest rate will remain stable for only seven years and then begins to fluctuate in year eight of the loan. If you are thinking of moving in about seven years, this might be a good loan product.
5. 5/1 and 3/1 ARM – These mimic the 10/1 and 7/1 ARMs, but the interest rate fluctuates every single year for a long period of time. This is one of the riskiest home loans to have, unless you are only going to keep your home for a short period of time.
6. 5/5 and 3/3 ARM – Another adjustable rate home loan product, this one remains stable for five or three years, and thereafter adjusts every five or three years. The interest rate adjustments are fewer – over the life of the loan – than the 10/1 or 7/1 loans, but they are adjustments nonetheless and thus carry the risk associated with an adjustable rate mortgage.
7. Balloon Payment – A mortgage with a balloon payment entices the borrower with low interest rates but after three, five, or seven years the balance of the entire loan is due and payable in full. If you foresee having this kind of money at your disposal within this short time frame, you can save a lot of money in interest by opting for this loan product.
8. 7/23 Two Step or 30 due in 7 – It sounds confusing but it is actually a simple fixed and adjustable loan hybrid. For seven years the payment will be at the fixed rate initially negotiated when the loan was written up. In year eight the interest rate adjusts up or down, depending on the current economic conditions, and the new interest rate will remain fixed for the remaining 23 years of the loan. This is a gamble because the rate in eight years could be significantly higher than it is today. If you are thinking of staying in your home for about seven years but possibly longer, this might be an option.
9. 5/25 Two Step or 30 due in 7 – This is a variation on the 30 due in 7 theme, except here the adjustment occurs in year six. If you are thinking of your home more in the short term and envision yourself upgrading or moving within five years, this might be a good loan product for you.
