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Fixed Rate Loans | Adjustable Rate Loans | Hybrid Loans

Loan Types

Let's examine the key differences in the various financing types

Fixed Rate Loans:

  • Same interest rate and payment throughout life of the loan

  • The thirty year fixed loan is the most common loan especially in the last five years after the mortgage market meltdown.  The payment stays the same for the life of the loan so it is predictable and helps in budgeting.  If you plan to stay in your house for a long time this would be a good choice.

  • A fifteen loan has a lower interest rate but the payment is significantly higher since the amortized life one-half of a thirty year loan.  This is generally for borrowers that plan to pay off the loan before they retire.

  • You can get variations of different amortization periods i.e. thirty years, twenty years, fifteen years ten years or even the number of years you choose. (Shorter term is usually the highest payment)

  • Most people facing retirement choose the Short term since most are in their late 40's or older they already have an income for a higher payment. 

Adjustable Rate Loans:

  • interest rate usually changes with type of index and loan period of the loan program, but offers a lower payment amount in the first few years .

  • With an adjustable rate loan the interest rate will change depending on the type of index and loan period of the loan program.  There are one month, six month, and one year adjustable loan programs.  You can choose your index too. The most popular are the LIBOR, the London Interbank Offered Rate, and the Treasury Bill index. 

  • Adjustable rate loans have a margin.  The margin is added to the index to make the “Fully indexed rate.”  This is your actual interest rate.  Needless to say you want an adjustable rate loan with a low margin.

  • These loans have a “cap” that limit how much the loan can increase for each period and for the “life” of the loan. 

Hybrid Loan:

  • A hybrid loan is a loan that has a fixed period and an adjustable period.  The loan can be “fixed” for three, five, seven or ten years.  It then turns into an adjustable loan. 

  • The advantage of this loan is the interest rate is lower than what the thirty year loan for the “fixed” rate period offers.

  • The three year loan has the lowest interest rate and it increases with each longer term.  After the fixed period is over it goes to a one year adjustable rate loan program. 

  • This is based on the same type of normal adjustable rate loan programs. 

  • The reason you would pick this loan is if you only plan to stay in the house for a predetermined time.

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