Although you may see many different types of mortgage loans, they all belong to two different families: Fixed Rate Mortgages and Adjustable Rate Mortgages. Here is some basic information on the two types of mortgages. Fixed Rate Mortgages
Fixed Rate Mortgages are the most popular type of loan. They offer a monthly payment that is known and does not change for the life of the loan. Most fixed rate mortgages are for terms of 15-30 years, with some as long as 40 + years. When choosing a longer loan term, beware of the interest rates. Although it might be lower payments when you choose a 30 year loan term, you will probably be paying higher interest payments.
Adjustable Rate Mortgages
An Adjustable Rate Mortgage is a loan in which your interest rate on the loan is periodically adjusted based on a variety of indexes. For example: a 3/1 ARM loan would offer a fixed rate for the first three years, adjusting once a year thereafter. The lender sets the interest rate by adding a margin to the index rate (I.E.: COFI, CD, Libor, Etc.).
Two Common Index Rates:
- Cost of Funds Index (COFI) - a regional average of interest expenses incurred by financial institutions, which in turn is used as a base for calculating variable rate loans.
- Certificates of Deposit Index - calculated by averaging the previous 12 rates of the 3 month CD rate.
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