Fixed - Rate Loan
Fixed-rate loans are the most common. The interest rate stays the same throughout the life of the loan. They are normally 30-year loans although they can be for 10 and 15 years with higher monthly payments.
For example, if you have a $100,000 mortgage loan at a 7% interest rate for 30 years. Payments would be $665.00 per month. You will pay over the life of that loan $239,400. Make sure the payments are received before the due date. If possible, make additional payments on the principal every month or when you can. You can also have PITI (principal, interest, taxes, & insurance) included into the loan. Sometimes TI (taxes and insurance) is separate from the fixed-rate payment.
Adjustable - Rate Loan
With this type of loan, the interest rate does not stay the same for the life of the loan. The rate can change from one month, quarter, or year to another. This can be an advantage in that you could have started the loan at 10% and two years later, you are paying only 8%. The disadvantage is it can go the other way and your rate is increased.
With an adjustable loan, be sure to get one with a cap. The cap is normally about 6% over the starting rate, this means that if your starting rate is 5% then your loan can adjust to a maximum rate of 11% over the life of the loan. However, your margin could go up to 2% per year if your contract or note is stated as such.
Most of the time lenders will only want the margin to be 1% per year because they want your business and they want to stay competitive in the real estate market. These rates are good if you want a very low payment, but you need to look out for negative amortization loans. Please do not get one of these types of loans when shopping for an adjustable rate loan (ARM). This means that you could be paying on your loan for 15 years, but if you want to refinance, you could owe more than your original note amount, so there would be no way you could refinance. You would be very disappointed and very unhappy. So please ask you mortgage company when buying your adjustable loan if the adjustable rate has a negative amortization.
If you are only going to stay in the property for a short time, three years or less, you may want to get an adjustable rate because you can get that very small payment, but if you don't like your payment going up or down then a fixed rate is the loan for you.
Interest - Only Loan
With this type of loan, your monthly payments are paying only the interest of the loan not the principal balance. For example, let's say you borrow $50,000 at an interest rate of 12% for 5 years on a 2nd deed of trust. The monthly payments are $500 per month and at the end of the 5 years, you will have to pay off that principal balance because you have only been paying the interest.
Paying off the principal amount is called a balloon payment. Of all loan types, balloons are the easiest to get, but they are the hardest to pay off. So unless you are going to refinance or get a back door clause in your note, (See Ways to Use Clauses), you may not want to get this type of loan. You have to stay on top of things because 50% of the people who get this loan type end up losing their property because they are not able to make that balloon payment.
If you do get this type of loan, don't wait until the last minute to refinance. Start the ball rolling about one year in advance of the payment due date.
Buy Down Interest Rate
You can buy down your interest rate by paying more in points on your loan. Points are commissions that the lender charges you when funding your loan. This is applicable when getting a new 1st deed of trust. All you will be doing is paying a higher closing amount at loan funding if you take that buy down rate. Which means you will get a lower interest rate by paying for the buy down.