Fixed Rate Mortgages

With fixed rate mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 40, 30, 25, 20, 15 years and 10 years. Generally, the shorter the term of a loan, the lower the interest rate you could get.

The most popular mortgage terms are 30 and 15 years. With the traditional 30-year fixed rate mortgage your monthly payments are lower than they would be on a shorter-term loan. But if you can afford higher monthly payments a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.

The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal

Adjustable Rate Mortgage (ARM)

The adjustable rate mortgage (or "ARM") offers a fixed initial interest rate with a fixed initial monthly payment. "Initial" is the key word here, because after some predetermined initial period, the loan is subject to changes in market conditions. The most popular adjustable rate mortgages are the 5/1 ARM and the 10/1 ARM.

How often the interest rate adjusts with an ARM depends on the terms of the loan. Take the 5/1 ARM as an example. 5/1 means your interest rate would stay the same for the first five years and then adjust each year starting at the sixth year.

Option ARM Mortgage Loan

A payment-option ARM is an adjustable-rate mortgage that allows you to choose among several payment options each month. The options typically include

_ a traditional payment of principal and interest (which reduces the amount you owe on your mortgage). These payments may be based on a set loan term, such as a 15-, 30-, or 40-year payment schedule.

_ an interest-only payment (which does not change the amount you owe on your mortgage).

_ a minimum (or limited) payment (which may be less than the amount of interest due that month and may not pay down any principal). If you choose this option, the amount of any interest you do not pay will be added to the principal of the loan, increasing the amount you owe and increasing the interest you will pay.

Balloon Loan

The balloon loan is a short-term, fixed-rate loan that lets you make small payments for an introductory period of time. After the introductory period - usually five, seven or ten years - you must refinance or pay off the remaining balance with one lump-sum ("balloon") payment

FHA Loan - A loan insured by the Federal Housing Administration, open to all qualified homebuyers. There are limits to the size of FHA loans, but they are usually enough to cover most moderately priced homes. FHA loans also offer low down payments (usually 3-5 percent).

Glossary

  Adjustable-rate mortgage (ARM)
A mortgage that does not have a fixed interest rate. The rate changes during the life of the loan in line with movements in an index rate. The index for your particular loan is established at the time of application

Amortizing loan
Monthly payments are large enough to pay the interest and reduce the principal on your mortgage.

Cap, interest rate
A limit on the amount your interest rate can increase. Interest caps come in two versions:

_ periodic caps, which limit the interest-rate increase from one adjustment period to the next, and

_ overall caps, which limit the interest-rate increase over the life of the loan. By law, virtually all ARMs must have an overall cap.

Cap, payment
A limit on how much the monthly payment may change, either each time the payment changes or during the life of the mortgage. Payment caps do not limit the amount of interest the lender is earning, so they may lead to negative amortization.

Negative amortization
Occurs when the monthly payments do not cover all the interest owed. The interest that is not paid in the monthly payment is added to the loan balance. This means that even after making many payments, you could owe more than you did at the beginning of the loan.

Prepayment penalty
Extra fees that may be due if you pay off the loan early by refinancing your home.

Principal
The amount of money borrowed or the amount still owed on a loan.

Equity
The difference between the fair market value of the home and the outstanding mortgage balance.

Index
The index is the measure of interest-rate changes that the lender uses to decide how much the interest rate on an ARM will change over time. Some index rates tend to be higher than others, and some change more often.

Interest
The price paid for borrowing money, usually given in percentages and as an annual rate.

Margin
The number of percentage points the lender adds to the index rate to calculate the ARM interest rate at each adjustment .