It’s pretty much a fact that there are more home loan choices than you might think. Yeah, there are two basic types of mortgages, a fixed and an adjustable, but the choosing only starts there. With a fixed rate loan, it’s fairly easy to understand. The rate stays fixed throughout the life of the loan. The only differences in fixed rates are the loan terms. Most borrowers who select the fixed route take the 30 year term. But there are other terms as well.
The second most popular loan term is the 15 year loan. In fact, when you peruse various web sites providing rate quotes, you’ll typically just see a 30 and 15 year option. But there are other terms and all lenders offer them, you just have to ask. Lenders can also offer a 25, 20 and a 10 year term. You need to run the numbers with your loan officer to figure out which is best for you, but generally speaking, the shorter the term, the higher the payment. And as a result of the higher payment, there is less interest paid with a shorter term loan.
The next choice is an adjustable rate mortgage, or an ARM. As the name implies, the rate can adjust, or change, at various points in the future under specific terms. When a consumer explores ARM choices, the most popular one in this category is the 5/1 ARM. There are other choices such as a 10/1, 7/1 and a 3/1. These programs are also referred to as ‘hybrid’ loans because they act like both a fixed and an ARM.
For example, with a 5/1 ARM. The loan is fixed for five years before turning into an ARM that can adjust one time per year. A 10/1 is fixed for 10 years before turning into a one-year ARM, for example. Why would someone choose a hybrid? Because the fixed portion of the ARM has a rate that is a bit lower than a straight 30 year fixed rate mortgage.
If for instance a 30 year rate is at 8.00%, you might be able to find a 5/1 rate around 6.75%. Borrowers who select this type of hybrid get to enjoy a lower rate for five years compared to a 30 year loan. Yes, turning into an ARM after five years does pose some additional risk in terms of higher rates, but remember there’s always the possibility of a refinance.
If fixed rates seem a bit too high for your situation, take a close look at a hybrid loan. Your loan officer will be happy to run the numbers with you.