Personal Finance Ology

Most loans fall into three major categories: Fixed-Rate, Adjustable-Rate, and Hybrid Loans, these combine features of both.

Fixed-Rate Mortgages

A fixed-rate mortgage carries the same interest rate for the full length of the loan. Due to their fixed monthly payment a lot of homeowners opt for this mortgage. It makes it easier t o budget your money knowing that your mortgage payment is going to be the same every month. This option can also help protect against inflation being that the interest rate is locked in. Fixed-rate mortgages are most common in 30-year and 15-year terms. However, more lenders have begun offering even 40-year loans.

Adjustable-Rate Mortgages (ARM)

Adjustable-rate mortgages have an interest rate that can change over the length of the loan. This is because the interest rate is tied to an index, measure of interest rate changes used to determine changes in the loan’s interest rate over the term of the loan, which may rise or fall over time causing your monthly payment to change as well. ARM loans usually have caps that limit the rate from rising above a certain amount between adjustment periods, the length of time between interest rate changes. This is usually no more than 3 percent a year. For example, a one-year ARM-interest payment would change annually. There is also a ceiling on how much the rate can go up during the life of the loan. This is no more than 6 percent. These caps protect you against dramatic increases in the rate. With these protections and low introductory rates, ARM loans have become the most widely accepted alternative to fixed-rate mortgages. One last important to note is that some ARM loans have what is called a conversion clause. This is a provision in some loans that enables you to change an ARM to a Fixed-Rate loan. However, you usually cannot do this until after the first adjustment period and you may have to pay additional fees.

Hybrid Loans

Hybrid loans combine the features of both fixed-rate and adjustable-rate mortgages. Usually, a hybrid loan may start with a fixed-rate for a certain length of time and then later convert to an adjustable-rate mortgage. This may seem like the perfect situation for you, however be sure to find out how much the rate will increase once it is converted to an adjustable-rate mortgage. Alongside knowing this, you should also be aware that some hybrid loans do not have interest rate caps for the first adjustment period.

I would caution you to be very careful when choosing a hybrid loan. They can be very tricky. Some lenders will charge an introductory interest rate that is lower than a competing fixed-rate loan just to get you to choose their loan. However, this interest rate may later change to another, usually higher fixed interest rate for the time left on the loan. So before choosing a hybrid loan, be sure to consider all of these facts and ask as many questions as you need to get a full understanding of the terms of the loan.

This article certainly talks about a lot of different loans. However, it is important to gain a full understanding of the decision you are making when you are committing yourself to such a long-term agreement. Be sure you understand everything you are signing and why you have to sign. And with that said here’s to the progression of financially responsible homeownership!

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