There are thousands of different loan types available.  Below is a sampling of some of the most popular products:

• Fixed Rate Loans
• Adjustable Rate Loans (ARMs)

Fixed Rate Loans

These are loans that maintain the same rate throughout the period of the mortgage.  The terms that are currently available are 10, 15, 20, 25 & 30 years.  The monthly payment will remain the same for the length of the loan.  The last payment that is made will fully amortize (pay-off) the loan.

Adjustable Rate Loans (ARMs)

These are loans that have a rate which can adjust throughout the course of the loan’s repayment, depending upon the movement of a specified index.  One example of a commonly used index is the one year Treasury Bill.  ARM programs may initially offer a lower interest rate than a fixed rate mortgage.  This makes them attractive to people who, by taking the lower initial interest rate, qualify for a larger mortgage.  People who may benefit by choosing an ARM program are people planning on moving or refinancing within the first 5 years, people with a high probability of increasing their income, and people who need a low initial interest rate in order to qualify for their mortgage.

Before applying for an ARM, be sure to ask about the interest rate caps.  ARMs typically have 2 “caps”, or limits.  The first cap is on how high or low the interest rate can go up or down during each adjustment period.  The other cap sets the most your interest rate can go up or down during the entire life of the loan.  Caps of 2% per adjustment and 5% over the life of the loan are extremely common.  For example, if your loan starts at 5% and the per-adjustment cap is 2%, your interest rate for that adjustment period cannot go higher than 7%.  You also know that the interest rate cannot go higher than 10% over the life of the loan.  It is suggested that you take into consideration what your comfort level would be if you were to have to make a mortgage payment at the highest adjustment sometime in the future.

There are several types of ARM products available including a standard ARM, balloons, negative amortization loans and buy downs.

• Standard ARM: Available with initial rates that are fixed for 1, 3, 5, 7, or 10 years.  When the initial rate period is up, the loan will adjust based on a formula that varies from program to program.  The rate caps are typically 2% per adjustment and 5% over the life of the loan.
• Balloon: These are available with initial rates that are locked for 5 or 7 years.  Whatever the remaining amount that is left on the loan is due in full at the end of the rate period.  These loans should be carefully scrutinized.
• Negative Amortization Loans: These loans do not payoff the principal or the full amount of interest that is due.  Negative amortization is a loan payment schedule in which the outstanding principal balance goes up rather than down.  This loan allows for the lowest possible payment that you can make.  These loans should be carefully scrutinized to make sure that you understand the pitfalls of a negative amortization loan.
  an Options
• Buy Downs: This program is based on a standard ARM program, but allows for reduced interest payments for the first couple of years.  The reduced interest lowers the mortgage payment and may allow someone to qualify for a loan that they otherwise would not have qualified for at the higher rate.  The borrower is responsible for paying the difference between the below market rate of the loan and the initial rate.  This can be done with either a lump sum in escrow, or by paying the required points on the loan.