30-Year Fixed Rate Mortgage

This is the most popular and conventional loan program. Your monthly payment is calculated based on the initial interest rate and never changes for the 30-year life of the loan. The 30-Year Fixed Rate Mortgage is considered the most conservative because there is no risk that changing market conditions will affect your monthly payment.

This loan is probably right for you if you don't plan to move or refinance for at least 10 years and you expect interest rates to increase over this period, or you just feel comfortable knowing that your payment won't change no matter what. This loan may also be right for you if you don't expect your income to increase significantly over the next several years.

20-Year Fixed Rate Mortgage

Like the 30-Year Fixed Rate Mortgage, this program guarantees that your payment never changes over the life of your loan. Since you are committing to pay off your loan over a shorter period, however, your monthly payment will be significantly higher than for a 30-Year mortgage.

This loan may be right for you if you are interested in paying off your loan more quickly. This loan may also be appropriate if you expect to stay in this home in your retirement and you will be retiring in fewer than 30 years and wish to start retirement without mortgage debt.

15-Year Fixed Rate Mortgage

The most aggressive of the Fixed Rate Mortgage options, this loan is paid off in only 15 years, resulting in a much higher monthly payment. This program is for those who can afford the higher monthly payment and are willing to pay more over a shorter period of time with the goal of owning the home without debt as soon as possible.

This loan could be for you if you are very aggressive about owning your home sooner or are close to retirement and wish to remain in your home and start retirement without mortgage debt.

1-Year Adjustable Rate Mortgage

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 12 months on the anniversary of your loan. The amount of the rate change (referred to as an Adjustment) is determined by a mathematical formula based on the U.S. bond market (typically the yield on the 1 Year U.S. Treasury Bill). Your lender does not control this number, so it is safe to assume that your adjustment will be fairly determined (although you should always verify your new rate by comparing with published numbers).

This loan is considered quite risky because your payment may change significantly from year to year. In exchange for taking this risk, the borrower is rewarded with an initial rate that is significantly below market rates for 30-Year Fixed Rate Mortgages. Even after the loan adjusts, your new rates will typically be below rates being offered to new borrowers for the 30-Year Fixed Rate program. In periods of rising interest rates, it is possible that you will ultimately pay much more for a 1-Year Adjustable than a 30-Year Fixed Rate Mortgage.

This loan may be right for you if you need to qualify for the largest loan possible using your current income and you are confident that your income will increase significantly in the short term to cover any anticipated increases in rates over the next few years. Although this loan comes with adjustment rate caps (usually 2% limit per adjustment and 6% over the lifetime of your loan), you should assume that your first adjustment typically results in an increase in your interest rate.

This loan may also be right for you if you can afford any increases in your interest rate and are willing to take a chance on changes in interest rate in exchange for a lower initial monthly payment and, hopefully, low payments in subsequent years.

3-Year Adjustable Rate Mortgage

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 3 years. Your new rate is calculated based on a predetermined formula.

This loan, while risky, is safer than the 1-Year Adjustable Rate Mortgage only because it does not adjust as frequently. This loan is right for you if you are willing to take on a moderate amount of interest rate risk in exchange for a lower initial rate that cannot change for three years. This loan could be right for you if you expect to move or refinance in about three years.

This loan may also be right for you if you wish to qualify for more money now based on your current income and you expect your income to increase over the next three years to cover any adjustment in your monthly payments.

Finally, this loan may be right for you if you plan to stay in your home longer than three years, and your income will be able to absorb any increases in your monthly payment.

5-Year Adjustable Rate Mortgage

This is a 30-year loan in which the rate (and therefore your monthly payment) changes every 5 years.

This loan is a nice compromise between shorter term Adjustable Rate Mortgages and Fixed Rate programs. You might choose this program if you expect to stay in your current home beyond the initial five years, you still wish to keep your payments relatively low, and you are willing to accept a small amount of interest rate risk in exchange for this benefit. This program may not be right for you if you are concerned that your income may not support increases in your monthly payment.

3/1 Adjustable Rate Mortgage

This 30-year loan offers a fixed interest rate for the first 3 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 27 years of the loan. This loan has recently become quite popular by those seeking to minimize monthly payments while accepting a certain amount of risk.

This loan may be right for you if you wish to maximize the amount of loan you qualify for and expect to remain in this home for more than 3 years. This loan is generally the least expensive way to fix your monthly payment for the first three years of your loan. After that, this loan is like a 1 Year ARM with all of its risks and rewards. This loan may not be right for you if you are concerned that your income in three years may not cover your monthly payment after your first adjustment.

5/1 Adjustable Rate Mortgage

This 30-year loan offers a fixed interest rate for the first 5 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 25 years of the loan. This loan has a longer initial fixed period than the 3/1 Adjustable.

This loan may be for you if you fit the profile for the 3/1 Adjustable Mortgage but wish to trade off a higher initial rate for the security of a longer initial fixed period. If you are certain you will only remain in this home for less than the initial 5 years, consider the 5/25 Balloon Mortgage instead.

7/1 Adjustable Rate Mortgage

This 30-year loan offers a fixed interest rate for the first 7 years and then turns into a 1 Year Adjustable Rate Mortgage for the remaining 23 years of the loan.

This loan could be right for you if you plan to remain in this home at least the initial seven years but consider it likely that you may wish to remain longer. If you are certain you will only remain in this home for less than the initial seven years, consider the 7/23 Balloon Mortgage instead.

10/1 Adjustable Rate Mortgage

This 30-year loan offers a fixed interest rate for the first 10 years and then turns into a 1-Year Adjustable Rate Mortgage for the remaining 20 years of the loan.

This loan may be right for you if you plan to remain in this home at least the initial ten years, but consider it likely that you may wish to remain longer. Consider this loan if you wish to have a long period of fixed monthly payments, but still wish to enjoy some savings over the 30-Year Fixed Rate Mortgage.

5/25 Balloon Mortgage

Although your monthly payment is calculated as if you will pay off the loan over 30 years, this loan requires that you completely pay your remaining balance (a significant percentage of your original loan amount) in a single payment after 5 years. This loan may be suitable for those who will sell their home or refinance on or before the balloon payment date.

This loan could be suitable for temporarily relocated workers or others who are certain they will not stay in their new home beyond the 5-year period. Unlike the 5-Year Adjustable, 5/1 Adjustable, and 5/25 Two-Step programs, which also offer a fixed rate for 5 years, the borrower often enjoys a lower interest rate for this program because the borrower is not obliging the lender to extend credit beyond the initial fixed period.

Note: Some balloon programs offer the borrower a Conditional Right to Reset, which effectively provides for an extension beyond the initial fixed period.

7/23 Balloon Mortgage

This is a longer version of the 5/25 Balloon Mortgage. Your monthly payment is calculated based on a 30-year amortization schedule, but you are required to pay off your outstanding balance after 7 years.

This loan may be for you if you are certain you will be moving or refinancing on or before the 7-year deadline and you wish to have the security of a fixed payment amount during this period.

Note: Some balloon programs offer the borrower a Conditional Right to Reset, which effectively provides for an extension beyond the initial fixed period.

5/25 Two-Step Mortgage

This 30-year mortgage offers an initial 5-year fixed rate. After this initial period expires, the rate is adjusted once for the remaining 25 years of the loan.

Consider this loan if you expect to remain in the home for at least five years, but consider it a possibility that you could remain much longer. Since there is uncertainty about how much your payment will change after year five, you should only consider this program if you expect to be able to afford your post-adjustment monthly payment. If you are certain that you will be moving or refinancing within five years, you could consider the 5/25 Balloon program, but only if there is a significant monthly savings.

Note: This Loan is not known to be available in a Jumbo program.

7/23 Two-Step Mortgage

This 30-year mortgage offers an initial 7-year fixed rate. After this initial period expires, the rate is adjusted once for the remaining 23 years of the loan.

Consider this loan if you expect to remain in the home for at least seven years, but consider it a possibility that you could remain much longer and you are comfortable with the prospect of a future adjustment. If you are certain that you will be moving or refinancing within seven years, you could consider the 7/23 Balloon program, but only if there is a significant monthly savings.

Note: This Loan is not known to be available in a Jumbo program.

2/28 Adjustable Rate Mortgage

This program is a 30-year adjustable program, except that the first adjustment does not occur until 2 years into the loan. At this point, adjustments are typically made every 6 months. Ask your lender about the frequency of adjustments, since some 2/28 loans adjust every year.

This program is primarily offered for consumers with less-than-perfect credit. The intention of this loan is to allow the borrower 2 years to improve his or her credit rating, at which point the borrower may refinance at a better rate.

3/27 Adjustable Rate Mortgage

This program is like the 2/28 Adjustable Rate Mortgage, except that the initial fixed period is 3 years instead of 2 years.

Conforming or Jumbo?

Conforming refers to loans up to a federally set limit. Loans above that amount are considered Jumbo loans. For most people, the amount of the loan they are seeking is already determined by the amount of down payment they can afford and the sale price of the home (or existing loan balance in the case of a refinance).

Those borrowers whose proposed loan amount is near the federally set limit, or those who have significant flexibility in determining their down payment, should consider keeping their loan balance below this limit so that they may secure a Conforming loan. Conforming loans are most often (though not for all lenders) offered at lower rates than their Jumbo counterpart.

Ultimately, your potential lender will be your greatest source of answers and advice. Be sure to ask a lot of questions and ask for clarification if there is anything you don't understand.