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Types of Loans
Thirty-Year Fixed Rate Mortgage
The traditional 30-year fixed-rate mortgage has a constant interest rate and
monthly payments that never change. This may be a good choice if you plan to
stay in your home for seven years or longer. If you plan to move within seven
years, then adjustable-rate loans are usually cheaper. As a rule of thumb, it
may be harder to qualify for fixed-rate loans than for adjustable rate loans.
When interest rates are low, fixed-rate loans are generally not that much more
expensive than adjustable-rate mortgages and may be a better deal in the long
run, because you can lock in the rate for the life of your loan.
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Fifteen-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features constant
monthly payments. It offers all the advantages of the 30-year loan, plus a lower
interest rate -- and you'll own your home twice as fast. The disadvantage is
that, with a 15-year loan, you commit to a higher monthly payment. Many
borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments
that will pay off their loan in 15 years. This approach is often safer than
committing to a higher monthly payment, since the difference in interest rates
isn't that great.
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Hybrid ARM (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular ARMS -- also called 3/1, 5/1 or 7/1 -- can offer
the best of both worlds: lower interest rates (like ARMs) and a fixed payment
for a longer period of time than most adjustable rate loans. For example, a "5/1
loan" has a fixed monthly payment and interest for the first five years and then
turns into a traditional adjustable-rate loan, based on then-current rates for
the remaining 25 years. It's a good choice for people who expect to move (or
refinance) before or shortly after the adjustment occurs.
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Adjustable Rate Mortgages (ARM)
When it comes to ARMs there's a basic rule to remember...the longer you ask
the lender to charge you a specific rate, the more expensive the loan.
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2/1 Buy Down Mortgage
The 2/1 Buy-Down Mortgage allows the borrower to qualify at below market
rates so they can borrow more. The initial starting interest rate increases by
1% at the end of the first year and adjusts again by another 1% at the end of
the second year. It then remains at a fixed interest rate for the remainder of
the loan term. Borrowers often refinance at the end of the second year to obtain
the best long-term rates. However, keeping the loan in place even for three full
years or more will keep their average interest rate in line with the original
market conditions.
Annual ARM
This loan has a rate that is recalculated once a year.
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Monthly ARM
With this loan, the interest rate is recalculated every month. Compared to
other options, the rate is usually lower on this ARM because the lender is only
committing to a rate for a month at a time, so his vulnerability is
significantly reduced.
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Negative Amortization (Neg. Am) Loan
This is a deferred-interest loan which is very powerful -- and the most
misunderstood mortgage program because of its many options. Basically, the
lender allows the borrower to make monthly payments that are less than the
accruing interest. Therefore, if the borrower chooses to make the minimum
monthly payment, the loan balance will increase by the amount of interest not
paid on the loan. The power of this loan lies in the borrower's ability to
choose between making the full loan payment, or the minimum payment, or any
amount in between. If a borrower's income varies throughout the year (due to
commissions, bonuses, etc.), the borrower can make a lower payment during the
"lean times", and then make higher payments when funds are readily available.
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