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Mortgage Options

Understanding the mortgage options available to you is a key step in the home buying process. Below is a brief overview of the most common types of mortgages.

Fixed-Rate Mortgages

The major advantage of a fixed-rate mortgage is that it presents predictable housing costs as your interest rate, monthly principal and interest (P&I) payments remain the same for the life of the loan. They are:


% Term—Fixed Rate Mortgages are available from 10, 15, 20 or even 30 years.


Predictable Interest Rate—Your interest rate, monthly principal and interest (P&I) payments stay the same for the life of the loan.


Security—You’ll be protected against the possibility of rising interest rates or other market fluctuations.


Control—If you don’t expect your monthly income to rise significantly and/or you plan to stay in your home for a number of years, a fixed-rate mortgage can be the right choice.


Adjustable Rate Mortgages (ARMs)

An ARM is a mortgage in which the interest rate is fixed for a period at the beginning, called the initial rate period.  After that the rate may change based on movements in an interest rate index. ARMs can be an excellent choice of financing under certain conditions, such as rising income expectations, high interest rates, and short-term ownership. Since monthly principal and interest payments may increase when the interest rate adjusts, it’s important for homebuyers considering this kind of mortgage to have the income to keep up.

ARMs can be the right choice for financing under certain conditions:

  • Rising Income

  • High interest rates

  • Short-term ownership

  • If you plan to refinance soon

Since monthly principals and interest payments may increase when the interest rates adjust, it's important for home buyers considering this kind of mortgage to have the income to keep up. There is, of course, the chance the interest rate could remain the same or even drop, which is a further reason why an ARM may be an attractive choice.

Each ARM has four basic components. They are:


Initial Interest Rate—The rate is usually one to three percentage points lower than that of most fixed-rate mortgages. Lower initial interest rates also make ARMs somewhat easier to qualify. The initial interest rate ties to certain economic indicators that dictate in part what the monthly payment will be.


Adjustment Interval—The time between changes in the interest rate and/or monthly payment; typically one, three, or five years, depending on what index is used. ARMs are generally offered in 1, 3, 5, 7 or 10 year terms. 


Index—The benchmark interest rate an ARM's fully interest rate is based on. The most common indexes are the one year Treasury and the five year Treasury.


Margin—The additional amount the lender adds to the index to establish the adjusted interest rate on an ARM. 

A lender who offers ARMs must give a disclosure about its ARM program at the time the applicant is given an application form (or collects a non-refundable fee). A lender must notify you a minimum of 45 days prior to a rate change. 

Bank In-House Portfolio Programs

Bank in-house programs may allow greater flexibility in the approval process. Inquire within your bank.