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Loan Types

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.

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

Disadvantages

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

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.

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

Disadvantages

Loan Balance Due can Change Long Term Financial Planning

If You Plan to Live There Over 7 Years

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.

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

Disadvantages

Periodic Payment and Rate Increases

Possible 6% Lifetime Rate Increase

Builds Equity Slower

Payment Increases May Affect Budget

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.

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

Last Updated ( Monday, 03 April 2006 )

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