Loan Programs

Types of Real Estate Loans

Fixed / Adjustable Rate Hybrids

These loans are fixed for the initial term of the loan, and then become adjustable. Usually they are lower in rate than the 30 year fixed rate loan, and offer lower payments since they are still amortized over 30 years, like their 30 year fixed cousins.

The most popular is the 5/1 ARM, which also has other names. The rate is fixed at the start rate for 5 years, and then becomes an adjustable rate mortgage for the remaining 25 years of the term. The rate is then based upon a Treasury Securities indexes, LIBOR, or other established index. This loan is for someone who wants to get a lower payment in the near term and does not need the security of a longer term. This is very common for Condominium owners, since the average occupancy time is usually only a few years. The interest savings over 5 years can be thousands of dollars. This format is popular for both conforming & Jumbo loans.

Other common versions include a 7/1 ARM and 3/1 ARM, as well as 10/1 ARMS. All of these loans are generally 30 year loans, even though they are not fixed for the entire 30 years. The "1" refers to the period of adjustment after the loan becomes adjustable. A 5/6 ARM would adjust every six months, where a 5/1 ARM would adjust annually after the initial adjustment. It doesn't exactly follow logic, but these terms were primarily intended for industry insiders. The general public is only interested in one loan: Theirs, and a detailed description of the loan is generally provided by the Mortgage Professional originating the loan. Since it has elements of both a fixed and adjustable rate, a detailed description is recommended. A careful examination of the index and margin, as well as the other features of the loan, is recommended.

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