Loan Types

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Fixed Rate Loan

Fixed-Rate loans are the most popular type of mortgage loan because the loan is based on an interest rate and a monthly Principle and Interest payment that do not change over time. Property taxes and insurance costs may fluctuate, but many borrowers find fixed-rate home loans to be the best mortgage for their needs because they can create a budget and rely on a steady payment. Fixed-rate mortgages are offered on all Conventional, FHA loans, VA, and Jumbo loan products.


Most mortgage companies offer fixed-rate options with 15 or 30-year terms, but you can also explore alternatives like 10 or 20-year terms. The longer the term, the higher the interest rate will be. The longer term, however, generally creates a lower payment because the payback is spread out over more years.

*Please visit our Disclosures page for more details for all loan types

Adjustable-Rate Loans

An adjustable-rate mortgage differs from a fixed-rate mortgage in a lot of ways. Most importantly, with a fixed-rate mortgage, the interest rate remains the same during the life of the loan. With an ARM, the rate changes periodically, usually in relation to a financial index, and the payments can go up or down depending on how the index performs.



All ARM’s have some common features. Basically, they are the adjustment period, the index, the margin, the note rate, the initial rate, interest rate caps, and payment caps.

Payments are calculated by adding the margin set by the mortgage lender to the particular index. Some common indices utilized include:


  • Cost of Funds Index
  • Treasury Bills
  • LIBOR

Adjustable-Rate Mortgage Loans Feature the Following Components:

  • Adjustment Period

    An ARM loan must specify a specific time at which the interest rate may change. The adjustment period may be one year, three years, five years, or some other period. A three-year or five-year ARM loan usually offers a lower interest rate for the first period of adjustment and then converts to a one-year adjustable. The loan is still considered a 15- or 30-year loan.

  • Index

    An index is a measure of economic conditions. Indexes include U.S. Treasury securities, the Cost of Funds Index (COFI), the Federal Home Loan Bank average, and LIBOR (the London bank rate). A mortgage lender selects an index and bases the interest rate on that index plus the margin of profit desired to achieve a certain yield or profit. The index goes up or down regularly

  • Margin

    A mortgage lender sets a margin, usually between 2 percent and 3 percent, at the time of a loan’s origination and adds it to the current index to set the interest rate, assuring the desired yield on the loan.

  • Fully Indexed Rate, or Note Rate

    The index plus the margin establishes the fully indexed rate or note rate. This is often very close to the current market rate and is therefore not attractive to a borrower. To find a market for the adjustable rate loan product, the lender often offers a lower initial or “teaser” rate.

  • Initial Rate

    The initial rate is lower than the current market rate and is fixed for the specific adjustment period set by the mortgage lender at the origination of the loan. In all probability, the interest rate will increase in the second adjustment period since the initial rate was deliberately set lower than the market rate to attract borrowers to the product. This sudden increase in payment may create a serious problem for the borrower.

  • Interest Rate Caps

    To protect borrowers from unlimited increases in the interest rate, lenders establish “caps”. The first cap sets the amount of increase (or decrease) allowed in each adjustment period. The second cap sets a maximum interest rate increase over the life of the loan. Caps of 2/6 are common.

  • Payment Cap

    It is essential to understand the difference between an interest rate cap and a “payment” cap. Some mortgage products have a payment cap that assures the borrower that the payment will remain the same, although the actual interest rate may fluctuate throughout the year. The difference between the interest paid and the interest due on the loan accumulates and is added to the principal balance due. This is called negative amortization and can result in customers owing more than they originally borrowed. A payment-cap loan is risky for borrowers and is generally not a good option.

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