When you start shopping for real estate loans, you will probably be overwhelmed by the immense variety of mortgage loans offered. While this gives you the opportunity to choose exactly the type of loan that will be the best for you, it can also get extremely confusing. The three most popular types of real estate loans or mortgages are: Amortized Loans (AL), Adjustable Rate Mortgage (ARM) and Hybrid Loans. Amortized Loan (AL) If you take the amortized loan (also known as a level-payment fully amortizing fixed-rate loan), you will pay equal monthly installments for its entire duration. The installments consist partly of principal and partly of interest - the proportions between them shift gradually from interest to principal, but the monthly sum you have to pay stays exactly the same. This kind of loan is very predictable and thus safe for the borrower, but because it lacks flexibility, the interest rates are usually a little higher when compared to adjustable rate mortgages. Adjustable Rate Mortgage (ARM) Adjustable rate mortgage (ARM) is the most popular type of real estate loan. Just as in the case of the amortized loan, you will pay a monthly installment that consists of both principal and the interest. Your installment amount, however, may go up or down because the interest rate changes through the term of the loan, depending on the changes of index rate(s) it is tied to. The most popular index rates are the prime rate, LIBOR (London Interbank Offered Rate), COFI (11th District Cost of Funds Index) as well as various Treasury Bill and Certificate of Deposit rates. To add some safety, most ARM rates have both annual and lifetime caps. These caps limit the amount interest rates can exceed yearly and during the entire life of the loan. Some adjustable rate mortgages offer reduced initial payments, but that's not the rule. Hybrid Loan Hybrid loans earned their name from the fact that they can be converted from amortized to adjustable rate loans and vice versa, depending on your decision. This adds a lot to the safety, as in the case of a market crash you can convert your ARM into a fixed rate loan or do just the opposite in the time of prosperity. Unfortunately nothing is perfect: most of the time hybrid real estate loans have either higher than usual interest rates or they can be converted only if certain conditions are met. Some of the conditions that need to be met include: an initial period of three years or longer (during that time the loan can't be converted), the current interest rate amount and/or the need to pay an additional fee for converting your loan. The choice between these three types of real estate loans depends mostly on your preference and comfort level. If you want stability and you are able to pay extra for it, go for the amortized loan. If you want to pay as little as possible and you want to risk a little, apply for the ARM or hybrid loan. Just remember to check the annual and lifetime caps or you may find yourself in trouble at some point during the life of the mortgage. |
