With all of the different mortgages available today, finding the right mortgage for your situation can be confusing. By doing your homework and by learning more about the options available to you, you can find the best loan to suit your individual needs. To assist you in your search, we have identified some of the most common mortgages below.

Fixed-Rate Mortgages

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As the name implies, a fixed-rate mortgage has a fixed term (most commonly 15, 20 or 30 years) as well as a fixed interest rate. As a result, your principal and interest payments will not change during the term of your mortgage. Early in the loan period, a large percentage of your monthly payment will be applied to interest repayment. As the loan is paid down, the amount of your payment applied to interest will decrease and more of your payment will be allocated toward paying off your principal balance.Fixed-rate mortgage interest rates typically reflect the overall direction of interest rates and can vary based upon your credit rating and the term of the mortgage. As a general rule, you will typically find that the longer the term of the fixed-rate mortgage, the higher the associated interest rate. This is because with a longer term mortgage, the bank is assuming greater risk.Since your monthly payment doesn’t change with a fixed-rate mortgage, this type of mortgage is easy to plan and budget for and can help protect you against inflation and rising interest rates. If you intend to stay in your home for ten years or if you are risk-adverse, a fixed-rate mortgage may be the right choice for you.

Adjustable-Rate Mortgages (a.k.a. Variable-Rate Mortgages)

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Adjustable-rate mortgages, commonly referred to as ARMs differ from fixed-rate mortgages because the interest rate on the mortgage will be adjusted up or down according to the current interest rate levels. Therefore, the amount of your monthly mortgage payment including principal and interest will go up and down with rate changes.

On an ARM, the interest rates are associated with an index which reflects the cost of borrowing. Your lender will assign an index to your loan at closing. Your payments will fluctuate as the index goes up or down. To protect a lender from losing money, the lender will also assign a margin to work as the floor. The margin, which may be anywhere from 2 to 5 percent, is also set at closing and remains fixed for the entire term of the loan. In order to protect the borrower against dramatic increases in the rate, ARM loans usually have caps that limit the rate from rising above a certain amount between adjustments as well as a ceiling that limits how much the rate can go up during the life of the loan.

You may encounter a variety of ARMs including Fixed-Period ARMs, Interest-Only ARMs and Pay-Option ARMs.

Fixed-Period ARMs
With a fixed-period ARM, your interest rate is fixed for a pre-determined term (i.e. most commonly 3, 5 or 7 years). For the specified term, your payments are at a fixed rate including interest and principal based upon the initial rates. After the specified term, your payments will fluctuate based upon your adjustment intervals and the current index rates.

Interest-Only ARMs
With an interest-only ARM, you will pay only the interest during a pre-determined interest-only period of your ARM. During this time, the principal of your mortgage will not be paid-down at all. The principal will be paid down over the remaining term of your mortgage after the interest-only period. When the fixed period of the ARM expires, your payments will be recalculated based upon the principal and the interest at the indexed rate.

Pay-Option ARMs
A pay-option ARM (a.k.a. Pick-A-Payment and Cash Flow Option ARMs) gives you creative payment options to select from when setting up your ARM. When making a payment, borrowers can choose from four options:

• Minimum Payment Option. This option frees up the most money for a borrower. Under a minimum payment option, you will make a minimum payment based on a low initial rate that has not been indexed. This option can be risky in that your minimum payment may not cover the fully indexed rate causing negative amortization and adding to your outstanding principal balance.   
• Interest-Only Option. This option allows you to pay only the interest due on the outstanding principal based upon the fully indexed rate. This option is not available when the interest payment is less than the minimum payment due.
• 30-Year Fully-Indexed Option. This option, which will help you stay on schedule, allows you to make a principal and interest payment based upon the prior month’s fully indexed rate, the outstanding balance and the term.
• 15-Year Fully-Indexed Option. The 15-year option is available on loan terms higher than 15 years and allows you to pay off you loan at an accelerated rate. Under this option, you will make a principal and interest payment based upon the prior month’s fully indexed rate, the outstanding balance and a 15-year term. This option is only available until the loan has been paid to its 16th year.

ARMs typically have lower interest rates than fixed-rate mortgages during the initial period. As a result, many individuals who are in areas realizing significant home value appreciation or those who know they will only be in the home for a short period of time (i.e. 3 years) due to job relocation, retirement or upsizing, have seen great benefit in an ARM. Additionally, since their initial payments can be lower, if you are confident your income will rise during the fixed period of time, and you want to keep your payments low initially, an ARM may be the right choice for you. Finally, many self-employed and/or affluent individuals have used ARMs to lower their initial payments and free up money to pay off higher interest debts or invest in alternative sources.

Piggyback Loans (a.k.a. Combo Loans)

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If you do not have much money to put down on a home, you may want to look at taking out what is known as a piggyback loan. When a borrower does not have at least a 20% down payment on a home, it places greater risk on the loan for the lending institution. Therefore, a borrower is charged a premium for something known as Private Mortgage Insurance (PMI). PMI protects the lender for a loss in the event that a borrower defaults on their mortgage. With a piggyback loan, the lending institution splits your loan at 80 percent LTV and takes out a second lien for the outstanding balance to cover the full sales price. By doing this, a piggyback loan allows you to avoid PMI premiums and payments.

Typically, piggyback loans are used to avoid PMI or to avoid the jumbo loan limit.