Types of Loans

The following is a list of common loan programs. Many more products are available.

Fixed Rate

A fixed rate loan has an interest rate that remains constant over the life of the loan most typically a 30-year or 15-year term.

Buy Down

The interest rate is reduced for a specific period of time by paying a portion of the interest in advance.

Balloon Loan

These loans are amortized using thirty-year amortization payments, but at the end of a shorter term (3, 5, 7 or 10 years) the remaining balance is due. Most balloon loans have an option to be extended at a rate determined by adding a margin to an index for the remainder of the term of the loan. Thus a 3-27, 5-25, 7-23, 10-20.

Adjustable Rate (ARM)

Many different versions of adjustable rate mortgages exist. They all have an initial fixed rate (from one month to ten years) after which time the rate becomes fully indexed. The fully indexed rate is determined by adding an index to a margin. The initial period can be one month, three months, six months, one year, three years, five years, seven years, or ten years.

Example: a 5/1 adjustable rate loan is fixed for five years, and then converts to an annual adjustable rate determined by the index (typically one year treasury index) plus a margin (commonly 2.75%).

Negative Amortization Loans

These loans are adjustable rate loans. A minimum payment is established for a short term using a below current market interest rate. At the end of this introductory period, the loan becomes fully indexed based on the index plus the margin. The borrower has three options each month: 1) pay the fully indexed payment, 2) pay interest only, or 3) pay the minimum payment. To the extent that the minimum payment does not cover interest, the difference is added to the loan balance, thus "negative amortization" or "neg-am." When either of the following occurs: 1) five years from date of recordation or 2) the loan reaches 115% of the original loan amount; the borrower must make the fully indexed payment so as to amortize the loan over the remaining term of the loan.

Interest Only

Some lenders offer interest only payments on some of their adjustable rate loans. Typically the interest only period matches the fixed term of the loan. In most cases the interest rate for interest only loans is slightly higher than for amortizing loans.

Equity Line Loans

Home equity line of credit (HELOC) loans are typically based on the Wall Street Journal bank prime-lending rate. They may have an introductory rate at below prime for up to six months, at the end of which period they become fully indexed at prime plus a margin. They have a "draw" period of up to ten years, during which time the borrower can draw funds and/or repay principal. Required payments are interest only during the draw period, although principal payments can be made. After the draw period, the loan must be amortized over the remaining term.