|
Fixed Rate Mortgage The interest rate on this loan remains constant through the life of the loan. There is no change in the base portion of the loan, although you may have some adjustment in your monthly payments if you include escrow for insurance and taxes. Adjustable rate loans have less risk due to the interest rate remaining constant.
Adjustable Rate Mortgage (ARM) The interest rate on this loan will be fixed for a stated period of time and will then become adjustable for the remainder of the loan. For example, a 5-year fixed (30-year) loan would have a fixed interest rate for the first five years and then convert to an adjustable rate for the remaining 25 years. This adjustment is based on changes in a pre-selected index, and will take place according to a pre-defined schedule (generally every six months or every year). Your interest rate and monthly payment will fluctuate based on changes in your index. The most common indices are the Treasury Bill, Certificate of Deposit (CD), LIBOR and COFI. Adjustable rate loans have more risk due to the possibility that the interest rate could increase. However, because you are assuming additional risk the lender will generally reward you with a lower interest rate and monthly payment during the initial fixed interest period. These loans are of particular benefit to borrowers that plan to either sell the property or refinance before reaching the adjustable period. Interest Only Mortgage Interest only loans do not reduce the principle with your payments. They are often used as temporary loans, with the intent of converting the loan to a Fixed Rate or Adjustable Rate Mortgage at a later date. |
|
Developed by Bob & Karin Pecaut. |