The Different Types of Mortgage Loans

For those who want to apply for a mortgage loan then you should know about these different programs: 1. Fixed Rate Mortgage - with a fixed-rate home loan, your interest rate remains the same for the life of the loan and the…
For those who want to apply for a mortgage loan then you should know about these different programs:
  1. Fixed Rate Mortgage – With a fixed-rate home loan, your interest rate remains the same for the life of the loan and the payment is split into equal monthly payments for the duration.

    During the first few years, only a small portion of the payment pays off principal. Most goes to pay-off interest.

    "Fixed-rate home loans can be 10 years, 15 years or 20, but most popular is the 30-year because that makes your payment the lowest," says Floyd Walters, owner of BWA Mortgage in La Canada Flintridge, California. Source: Bank Rate


  2. One Year ARMs – A mortgage loan in which the interest rate changes based on a specific schedule after a “fixed period” at the beginning of the loan is called an adjustable rate mortgage, or ARM. This type of loan is considered to be riskier, because the payment can change significantly. In exchange for the risk associated with an ARM, the homeowner is rewarded with an interest rate lower than that of a 30-year fixed rate. When the homeowner acquires a 1-year adjustable rate mortgage, what they have is a 30-year loan in which the rates change every year on the anniversary of the loan.

    However, obtaining a 1-year adjustable rate mortgage can allow the customer to qualify for a loan amount that is higher and therefore acquire a more valuable home. Many homeowners with extremely large mortgages can get the 1-year adjustable rate mortgages and refinance them each year. The low rate lets them buy a more expensive home, and they pay a lower mortgage payment so long as interest rates do not rise.

    The loan is considered to be rather risky because the payment can change from year to year in significant amounts. Unless the buyer plans to quickly flip the property or has plenty of other assets and is using an interest-only loan as a tax write off, almost anyone taking adjustable rates should try to pay extra in order to build up equity in case the market turns south. Source: Mortgage Calculator


  3. Tracker Mortgages – Tracker mortgages move directly in line with another interest rate – normally the Bank of England’s base rate plus a few percent. So if the base rate goes up by 0.5%, your rate will go up by the same amount.

    Usually they have a short life, typically two to five years, though some lenders offer trackers which last for the life of your mortgage or until you switch to another deal. Source: The Money Advice Service
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