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The Normal Peoples Guide
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 The 3 Categories of Conventional Loans Are:
  1. Fixed Rate Loans
  2. Hybrid Adjustable Rate Mortgages (ARM's)
  3. Option ARM (Negative Amortization Loans)

This page briefly defines loan types. For in depth understanding of the pros and cons of adjustable rate loans, please see the pages dedicated to "Option ARM" and "Hybrid ARM's".

Fixed Rate Mortgage

These are the standard loans whose rate is fixed for the term of the loan. The most common are the 30-year fixed and 15-year fixed. However, other products exist including 10, 20, 25 and 40 year fixed rate loans. I heard about a 50-year fixed at one point; but haven't seen it on the rate sheets of lenders I work with. I think that loan may have gone away along with most of the sub-prime industry.

Hybrid Adjustable Rate Mortgage (Hybrid ARM)

The rate for a Hybrid ARM is fixed for a period of time, and then it adjusts. The most common fixed periods are 3, 5, 7 and 10 years. The loan adjusts after that time and is calculated by adding an index and a margin. If you are considering a Hybrid ARM, and may keep the loan beyond the fixed period, the adjustment guidelines are important. Please read the tab "Hybrid ARM's"

Option ARM (Negative Amortization Loan)

Option ARM's offer you the option of paying a minimum payment, interest only payment, or interest and principal payment. The minimum payment is usually lower than the interest only payment (although not always). If it is lower, and you pay the minimum payment, you will "go negative"; which means you will owe more money to the lender next month than you did this month. Option ARM's come in two flavors:

  1. The actual interest rate is fully adjustable. It usually adjusts monthly, sometimes every 3 months. The minimum payment rate increases slightly every year (The payment goes up 7.5%. So if it was $1,000, the second year it would be $1,075)
  2. The actual interest rate and the minimum payment rate are both fixed for a number of years, usually 3, 5, or 7 years.

Loan Types Defined
Hybrid ARM's Explained
Option ARM (
 

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