The four main loan types

There are four main loan types. Learning the differences in these loan options is very important to your home purchasing process.

The 15 year conventional loan: You pay the entire loan off in fifteen years. The rate stays fixed for the entire period.

The 30 year conventional loan: You pay the entire loan off in thirty years. The rate
stays fixed for the entire period. The ARM (Adjustable Rate Mortgage) loan: The period for this loan is 30 years,
however, only the first portion has a fixed interest rate. For example, a 5/1 ARM has a fixed interest period of five years. After the first five years, the rate adjusts at the market rate. This adjustment is calculated once yearly.

The Interest-Only ARM loan: Similar to the ARM described above, except that you are only paying the interest on the loan. At the end of the period (when you sell your house, for example), you still owe the entire principle amount. For example, if you buy a $400,000 home, and sell your home in five years, you still owe $400,000 on the home. However, in most cases, the home will have risen in value, so you still have equity in the home.

Professional Tip: Many buyers opt for a 30 year loan because it is what they are familiar with, or because it’s what their parents had. However, unless you are going to live in the home for 30 years, you would be well advised to consider other loan options. For example, consider a $400,000 home. Here are your payment options under the four programs:

15 year loan: $3,375.43
Calculated at 6% interest rate

30 year loan: $2,462.87
Calculated at 6.25% interest rate

5/1 ARM loan: $2,147.29
Calculated at 5% interest rate

5/1 Interest-Only ARM: $1,666.67
Calculated at 5% interest rate

As you can see, your payment under the interest-only loan is $796.20 less per month. If you were to pay $2,400
per month with the interest-only loan, you could afford a $590,000 home!
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These ‘Professional Tips’ show you how important it is to have a Realtor representing your interests!

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