Terms of Loans
15, 20, & 30 Year Loans
A 15 year fixed rate mortgage has some distinct benefits. It allows you to pay off your mortgage quickly with the security of a payment and rate that remains constant throughout the life of the loan. On top of that, it allows you to pay less interest over the course of the loan, saving you money in the long run. Additionally, interest rates are typically lower on 15 year loans compared to longer term loans.
A 20 year fixed rate loan might be a good choice for you if you are looking for a lower monthly payment along with the security of knowing your payment will not change throughout the course of the loan.
A 30 year fixed rate loan is the best choice for you if you are planning on staying in your home for a long period of time. This loan will offer you the lowest monthly payment, allowing you to possibly look at higher value homes, while also keeping your finances more liquid over the life of the loan.
The option to prepay your mortgage at any time without incurring penalties is especially important to think about with a 30 year loan because you can significantly reduce the amount of interest you pay over the lifetime of the loan while also paying the loan off earlier.
All fixed rate loans allow for the option to pay your loan off early with no prepayment penalties.
Types of Loans
Fixed Vs. Adjustable:
Fixed Rate Mortgages:
Fixed rate mortgages are typically 15 to 30 year loans where the monthly payments and the interest rate remain constant throughout the lifetime of the loan.
These types of loans are ideal if you are planning on living in the residence for 7 years or more and you expect your income and overall expenses to remain the same. Fixed rate mortgages are best for people who like the stability of fixed principal and interest payments while not worrying about the monthly payments increasing.
Adjustable Rate Mortgages:
Adjustable rate mortgages, or ARMs, are 15- 30 year loans where the interest rate on the loan may fluctuate depending on the terms of the loan and the market interest rate. This will cause your monthly payments to increase or decrease during the term of your loan.
ARMs are ideal if you are planning on living in your home for less than 7 years and you expect your income to increase in the future. Also, you should be comfortable with the possibility that your monthly payments may increase during the lifetime of your loan.
3/1, 5/1, 7/1
3/1 ARM- This type of loan is fixed for 3 years and then in the 4th year converts to an adjustable rate mortgage for the rest of the term of the loan. This adjustable rate will be directly affected by 1-year treasury index which is added to a margin, usually between 2.25%-3.0% to get to your new monthly payment.
Like the 3/1 ARM, the 5/1 ARM and 7/1 ARM operate as fixed loans for the first agreed upon period of loan and then adjust to an ARM after the initial period.
The index is a rate which is set by the market and published by a third party. Various ARM indexes include LIBOR, MAT, COFI and CMT.
Indexes can be based on rate averages or spot rates. The benefit of rate averages is that the fluctuations in your monthly rate will move more slowly. The margin is typically higher on rate averages, which means your overall payment could be higher than with spot rates where fluctuations are more abrupt.
Margins are the agreed-upon number of percentage points which are added to the index to determine your interest rate on your loan.
Caps are limitations on charges having to do with ARM mortgages. This protects the buyer from the risk of financial hardship when dealing with market fluctuations. Typical caps are applied to the frequency of the change in interest rates, the periodic change in interest rates and the total change of the interest rate over the lifetime of the loan.