HOME CENTER: Financing

The Two Basic Types of Mortgages

Financing
Related Links
Discussion Boards

Once you know some of the basics about mortgages, you can more closely examine the different types. You should familiarize yourself with two basic kinds of mortgages before we get to some of the more exotic variations.

Fixed-Rate Mortgage

This is the plain-vanilla loan that most people think of when considering a mortgage. You will owe a certain percentage of the loan as interest to the lender. This amount never changes, and your monthly payment will remain the same over the life of your loan. Fixed-rate mortgages are usually for 15 or 30 years.

ARM

No, not the thing hanging from your shoulder. This is an "adjustable-rate mortgage." The interest rate changes to reflect changes in the credit market out in the great, wide world.

The first-year rate (otherwise known as the teaser rate) is generally a couple of percentage points below the market rate. There are also upward limits, above which the interest rate isn't allowed to go -- this is called the cap. If your teaser rate is 4%, and you have a five-point cap, then the highest that your interest rate can go is 9%.

What's more, the amount that the interest rate can rise each year is limited, usually to one or two percentage points per year. The frequency at which the rate adjusts might vary; make sure you know these features.

If you're considering an ARM, think about the worst-case scenario. What if interest rates go up, and your ARM adjusts to its maximum? What will that maximum be, and when will it kick in? Will you be able to afford the payments?

And that, folks, is it: the two major types of loans.