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Understanding the Different Loan Products

There are many different loan products out there – each loan product is designed for a different purpose, or a different kind of borrower. Some types of loan products include:

  • 30 Year Fixed Rate Mortgage
    The 30 Year Fixed Rate Mortgage amortizes over 30 years and results in identical payments for the duration of the loan. The payments and the interest rate on this loan never change over the life of the loan
  • 15 Year Fixed Rate Mortgage
    The 15 Year Fixed Rate Mortgage amortizes over 15 years, and just like the 30 Year Fixed Rate Mortgage, the interest rate and payments never change over the life of the loan. The two biggest differences from the 30 Year Fixed Rate Mortgage are the facts that this loan will be completely paid off in half the time (15 years versus 30 years), and that the monthly payments will be higher.
  • Adjustable Rate Mortgage
    The Adjustable Rate Mortgage can be of various terms (15 and 30 years are most common) but unlike the 30 Year Fixed Rate Mortgage and the 15 Year Fixed Rate Mortgage, the interest rate and the monthly payment may vary. Adjustable Rate Mortgages are tied to one of many indexes (the 6 month LIBOR and the 1 Year T-Bill would be examples) and as these indexes go up or go down the interest payments and the interest rate owed on the mortgage do up and down correspondently.
  • Interest Only Mortgage
    An Interest Only Mortgage is designed to have payments that cover the interest portion of the loan only – the principle amount never decreases during the interest only period of the loan. The interest only loan can have various time periods of interest only and also be an adjustable rate mortgage at the same time. A very common interest only loan is a 5 year ARM where the interest rate is fixed for 5 years before adjusting and also has the feature of interest only payments during the 5 year period. These types of loans are for highly qualified borrowers who can afford the payments drastically increasing after 5 years since the interest rate can go up and the loan requires principal payments starting year 6. There are many variations so make sure you discuss with your Mortgage Advisor all the terms of the interest only loan.
  • 2/28 Adjustable Rate Mortgage
    This is a hybrid loan type combining a 2 year fixed rate period where your interest rate and payments remain constant, followed by a 28 year adjustable rate period. During the adjustable rate portion of your loan both the interest rate and the payment may adjust as the underlying index value changes. This is an excellent product for borrowers who wish to repair their credit during the two year fixed period to qualify for a better rate upon refinancing during the initial first two years.
  • 3/27 Adjustable Rate Mortgage
    The 3/27 adjustable rate mortgage is almost identical to the 2/28 adjustable rate mortgage but where the initial fixed rate period is extended from two years to three years. This might be a preferable loan type compared to the 2/28 adjustable rate mortgage for borrowers who desire more time before they consider their refinancing options.
  • 5/25 Adjustable Rate Mortgage
    The 5/25 adjustable rate mortgage is almost identical to the 3/27 adjustable rate mortgage but where the initial fixed rate period is extended from three to five years. This is the most common ARM used by borrowers today.
  • 7/23 and 10/20 Adjustable Rate Mortgage
    These programs work the same as the other ARM’s with the exception of the fixed rate period being 7 or 10 years respectfully.

There are many other types of loan products including loans designed specifically for first time homeowners, Veterans of the United States Military, and loans specifically designed for low-income borrowers.

What type of loan is best for you? California Mortgage Advisors, Inc. is here to help you answer the question. Getting a mortgage can be complex; rely on licensed, trained and knowledgeable pros to make the process easier and clearer. Our Mortgage Advisors are available at (800) 927-6560 to answer your questions or click here to contact us online.