There are two main types of mortgage loans:
- Fixed rate mortgage
- Adjustable rate mortgage
The fixed rate mortgages have the interest rate and the mortgage payments that stay the same for the entire life of the loan.
The common fixed rate mortgages are 30 year fixed, 20 year fixed or 15 year fixed rate mortgages. The mortgage has to be paid of in the defined period in equal monthly installments.
An adjustable rate mortgage has an interest rate that changes with time and is dependent on the movements of an index rate, such as the rate for Treasury securities or the Cost of Funds Index. Since there is more risk involved in an adjustable rate mortgage, the ARMs usually have a lower initial interest rate than fixed rate loans. When the market rates increase, the interest rate of an adjustable interest rate also follows but generally there is a maximum and minimum range defined and the interest rate stays between this range.
The common types of adjustable mortgages are:
- Hybrid Adjustable Rate Mortgage: A hybrid arm is a mix of a fixed rate period and adjustable rate period. The initial period of the mortgage has fixed interest rate like a fixed rate mortgage. This initial period is the number of years defined in the contract. Like a 5/1 hybrid ARM has a fixed interest rate period for the first 5 years; then the rate adjusts every year after the initial 5 year period.
- Interest only ARMs: The interest only adjustable interest rate mortgage requires only the interest amount to be paid during the initial period. After the initial period, the monthly payment increase because the principal also needs to be paid back which was not being paid in the initial period.
- Payment option ARMs: The payment option adjustable rate mortgage lets you chose among several payment options each month.
