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Guide to Home Loans - All About types of Loans

3,5,7,10 Year Arms

These are the most widely known ARM's and almost any lender you check with will offer a wide variety of these.  The start rates are anywhere from 0.125% to 1.50% lower than the 30 year fixed conforming rate and are sometimes even easier to qualify for.  The 3,5,7 or 10 year period in which the initial start rate is good for allows the client to have a fixed rate for a defined period of the mortgage term.  Once this period expires the mortgage turns into an adjustable rate with yearly maximum payment and rate increases and usually carries a lifetime cap.  The most common feature of these mortgages is called a 2/6 cap.  This means that the mortgage rate can never rise any higher than 2% in any given year and only 6% over the entire life of the mortgage.

These types of ARM's are great for people who usually move within a foreseeable time period or whose job requires a lot of relocation however long term homeowners may prefer to have the stability of a fixed rate.  To find the best type of mortgage product for you please contact a mortgage professional by using the link below.

Teaser Rate Mortgages

Some lenders advertise adjustable mortgages with teaser or start rates as low as 2.95%.  Is this a misprint?  No, however one must be very careful in understanding exactly what these programs are.

These programs are usually targeted towards people who have sporadic income (i.e. self employed, independent contractors) and those who value a very low monthly obligation.  However, what every consumer should know is that most of these programs contain negative amortization.  What is negative amortization?  Simply put, it means that your monthly minimum obligation is not meeting the full payment required to start reducing your loan amount. So if you only pay the minimum on your monthly statement then you will gradually see your loan balance increase over the first few years.  A client should be really thorough before accepting one of these ARM's and have a qualified professional review the amortization schedule of the particular loan to make sure that all future needs will be met.

One good point is that these ARM's usually offer lifetime caps lower than those of the traditional 3,5,7 or 10 year ARM's.  In fact, a certain lender offers a lifetime cap as low as 9.45% thus if you pay the fully indexed payment every month you may never see negative amortization, hold a fairly safe ground against rising interest rates and still have the flexibility not to make a full payment during those months which you need a little more cash.

Contact a mortgage professional today to see if this product is right for you by clicking the link to the left.

Balloon Mortgages

Balloon mortgages offer lower interest rates for shorter term financing, usually five, seven, or ten years. At the end of this term, they require the borrower to pay off the entire outstanding balance with a lump-sum payment. Balloon mortgages may be right for you if you plan to sell or refinance your home within a few years and want a fixed, low monthly payment however they are not for everybody. The advantage they offer is an interest rate that is lower than that of a fully amortized fixed-rate mortgage. For example, your initial interest rate may be 7.00% with a five year balloon note when a 30 year fixed rate is in the 8.00% range. You would pay that rate for the first five, seven, or ten years, depending on the term of your balloon loan, then the balance would be due in full. To contact a mortgage professional who can better assist you please use the links to the left or the graphic below.

Adjustable Mortgages using a First and A Second - The 80-10-10

With an 80-10-10, you get a first mortgage for 80% of the purchase price, put 10% down and borrow the remaining 10% as a home equity line or fixed rate second.  This second loan is often referred to as a "piggy back loan".  To summarize the loan will consist of three parts as described below.

The main advantages of this product are to reduce or even waive your PMI liability allowing more of your money to go towards the principal of your new home and to enable borrowers to receive higher loan to values for their new home, or less of a down payment in other terms.  Most lenders will have fixed maximums on the money they will loan on first mortgages but when used in conjunction with a second loan these limits can increase by as much as 15% (otherwise known as CLTV - combined loan to value)

To be approved for an 80-10-10 you have to qualify for the payments on both the mortgage and the piggy back loan but may save you a lot of interest over the life of your loan.
Almost every major lender offers these types of loans so to find a lender in your area simply click the link at the bottom of this page.

We also recommend getting a quote for both types of loans, fixed and adjustable. You can then compare the monthly interest portions, mortgage insurance premiums and anticipated amortization schedules to make an educated decision.

Pre-Payment penalty

Always ask if your potential loan carries a prepayment penalty. If so, how long are they in effect for?  How much is the penalty?  3 years is usually the maximum time period for these penalties to be in force.  Penalties can range from 6 months interest to 3% of the total loan amount.

How are the margins Determined?

After the fixed period ends, what is the margin tied to the adjustable payment.  The higher the margin, the higher your payment will be.  An average margin runs about 1.5 to 2.5 points above an index.

What index will your new interest rate be based on?

Watch out for anything tied to the LIBOR index or private indexes of mortgage lenders.  These can be extremely high and are subject to greater fluctuations in rate than stable indexes such as the treasury bill.

conversion to a fixed rate?

Find out if you have an option to convert to a fixed rate during the live of the loan.  Some fees may apply but it may be well worth it if rates drop.

ARE THESE Loans Assumable?

If a loan has this feature it may be easier to sell a home when interest rates are high.  Less and Less common these days but worth looking for.

All images and text © Copyright JB Slemmer 2000, 2001, 2002, 2003, 2004, 2005, 2006 - email me at 

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