One of the first choices a homebuyer will need to make is whether you want a fixed-rate or an adjustable-rate mortgage loan.

Fixed-Rate Mortgage: Unlike an adjustable-rate mortgage the interest rate is set at the time you take out the loan and will not change. These loans are the most common mortgage loans in today’s market. They provide a stable monthly payment that will not increase even if the economy or market conditions falter. Fixed-rate home loans can have an amortization (repayment) period of 10 years, 15 years, 20 years or 30 years. Custom periods or your choice are available. The 30-year amortization period is the most common because it allows your mortgage payment to be the lowest. While shorter amortization periods have larger monthly payments, their interest rate is often lower. Thus, interest costs are significantly less over the life of the loan.

Adjustable-Rate Mortgage (ARM, and Hybrid ARMs): The interest rate of the mortgage adjusts up or down periodically based on market conditions. Most ARM loans today are Hybrid ARMs. Such loans start with an initial interest rate that can be somewhat lower than fixed rate loans. After the initial fixed period of a Hybrid ARM, the interest rate and payment will go up if market interest rates go up and go down if rates go down. Typically, the initial fixed period is 3, 5, 7, or 10 years, and rates and monthly payments change periodically thereafter. Most ARMs adjust the interest rate and payments annually, but some adjust monthly. ARMs have more complex features than fixed loans. Be sure to understand the terms and features of each ARM you consider.

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