Buyers & Sellers > Types of Loans

The Third Step: What Loan is Right for You?

While there are numerous kinds of home loans for various kinds of home buyers, and investors, they all can pretty much be classified into two distinct types: fixed-rate, and adjustable-rate (ARM) loans. The type of loan that is ultimately best for you depends on a host of factors that is beyond the scope of this site, but if you visit the buyer's resource section, you'll find numerous online resources to learn more about choosing the right loan for you.

If you can get a firm grasp on the pro's and con's of both fixed and adjustable rate mortgages, then making the final decision on which loan is best for you will be much easier. Below is a brief discussion of these two general types of loans, and the differences between them.

Fixed Rate Mortgage

As the name may suggest, a fixed-rate mortgage is a mortgage where the interest rate stays the same for the entire life of the loan. As a result, your monthly mortgage payment does not change.

The primary benefit of a fixed-rate mortgage lay in one's certainty that the interest rate will hold true, always, regardless of the economy. On the flip side, the downfall of the fixed-rate mortgage is that you'll end up paying a premium for this reliability, in the form of a higher interest rate.

When a mortgage lender grants a fixed-rate loan for a long period of time (like 30 or 40 years), they take on a certain amount of risk. If the prime interest rate goes up during the life of your loan, you will not have to pay the difference -- the lender will. This is why they charge a higher interest rate than with an adjustable-rate mortgages.

Adustable-Rate Mortgage (ARM)

These days, most adjustable-rate mortgages start off with a fixed rate for an initial period of time, usually 3, 5 or 7 years. During this introductory period, the interstate rate is fixed and will not change. After the introduction period, however, the loan converts to an adjustable-rate.

Lateley ARM's have come under fire from industry professionals and have been blamed for the increase in foreclosures across the nation - the truth is that each buyer's situation is unique when entering into a new mortgage, and for some the ARM may in fact be the right fit. I highly recommend considering all types of loans before making a decision when buying a house.

Step 2: "How Much House Can You Afford?" Step 4: "Mortgage Calculator"

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