30-Year Fixed Rate Mortgage
A 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 more affordable. 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 loans and may be a better deal in the long run because you can lock in the rate for the life of your loan.
15-Year Fixed Rate Mortgage
This loan is fully amortized over a 15-year period and features consistent 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 considerably significant.
Adjustable Rate Mortgage (ARM)
Unlike fixed rate loans, the interest rate on an adjustable rate mortgage varies throughout the life of the loan. The initial interest rate is fixed for a period of time, after which it resets periodically – some are recalculated yearly, while some monthly. 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.
Hybrid Adjustable Rate Mortgage (3/1 ARM, 5/1 ARM, 7/1 ARM)
These increasingly popular loans - 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.
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.