Home loans

Mortage types

When it comes to choosing a home loan, you have two basic options:

• Fixed-rate mortgage
• Adjustable-rate mortgage

Fixed-Rate mortage

Some of the advantages that fixed-rate mortgages offer are:

• Stability. With a fixed interest rate, you know exactly what you'll pay each month for the life of the loan. You don't have to worry about rates going up or down.
• Lower monthly payments. In general, the longer the term is the less your monthly payment is. For that same reason, qualifying for a longer-term loan can often be easier than for a shorter-term loan — you don't need as much income. Choosing a longer-term loan may allow you to afford a more expensive home.
• Fixed-rate mortgages most commonly come in terms of 15, 20, 30, and 40 years.

(A term of 15 years instead of 30 years can mean higher monthly payments. But it also means you'll pay off your mortgage sooner and build equity in your home faster).

Adjustable-Rate Mortgage (ARM)

The interest rate on an ARM can change over its lifetime. What you should consider as you research ARMs is how and when the rate changes. Those factors will affect how much your monthly payment is.

ARMs start out like fixed-rate mortgages. They have an initial period in which the interest rate and your monthly payment remain the same. The initial period can vary from several months to several years. After that, the rate and your monthly payment can go up or down for the remainder of the term. In general, ARMs come in terms of 15 to 30 years.

The rate you pay on an ARM is based on a fluctuating index plus a fixed extra amount, called a margin. Keep in mind that different indexes go up and down faster than others and both the index used and the margin can vary among lenders.