1) FIXED RATE MORTGAGES

The interest rate is locked in at the start, so your monthly loan payments stay the same throughout the life of the loan. The two types of FIXED RATE LOANS are

a) LONG-TERM FIXED-RATE MORTGAGE LOANS:

These carry a 30-year term. Down payments are 10 - 20 %. With a larger down payment you're exempt from paying mortgage insurance. For the first years most of your payments get applied toward interest, which is tax-deductible. If your agreement allows prepayment without penalty, you can also make additional payments on the principal. ONE extra payment per year can enable you to pay down your loan a lot faster, between 7 - 8! While payments are lower than for a short-term loan, long-term interest rates are generally higher: if you take out a $100,000 loan with 8 percent interest, you'll ultimately pay almost $100,000 more than for a 15-year loan. This is a good loan for buyers with a fixed, steady income, or who can't afford the payments of a short-term loan.

b) SHORT-TERM FIXED-RATE MORTGAGE LOANS:

Usually have 15-year terms, but the term can be as low as 10 years. As with long-terms, the interest rate and monthly payment are set for the life of the loan. But interest is lower, you pay less than half the amount of total interest, and payoff is quicker. Monthly payments are substantially higher—approximately 15 to 30 percent—and the requirements for qualifying are more stringent.

2) ADJUSTABLE-RATE MORTGAGE LOANS

ARMs carry an interest rate that's adjusted at specified intervals usually one, three, or five years. The starting interest is lower (usually by 1 to 4 percent) than that of almost any other type of loan, which makes it a great option for cash-poor buyers or for those who expect to move again in five to seven years. Variations in your rate are dependant on economic indexes such as Federal securities. At each interval every five years for a five-year ARM the rate is adjusted according to the index; additionally, the lender adds a margin of 2 to 3 percent. So if the index has taken a leap since your last interval, you could end up paying more per month than with a 30-year fixed-rate loan. But if you move out of your home within five years, or if the index rate drops, you can save a substantial amount of money over a fixed-rate loan. ARMs include some protection for the borrower in the form of a lifetime cap, specified in your loan agreement.

3) TWO-STEP MORTGAGES

Sometimes called "hybrid mortgages" or "resets" because they combine aspects of ARMs and fixed-rate loans. They are 30-year loans, referred to as 5/25s or 7/23s. These fractions refer to the length of the loan term. For example, with a 5/25 ("five twenty-five") your rate is lower during the first five years and then reset for the remaining 25 years. Like an ARM, the loan is tied to an index rate but with a lifetime cap of 6 percent over the original rate. These loans carry risk but they can also pay off, and you have the stability of fixed payments. If you know you'll be moving within five or seven years, you can save thousands of dollars with this type of loan, which can also adjust downward. The risk is that the index might have a sizable increase by the time your rate is reset. Both 5/25s and 7/23s have convertible or non-convertible options. With a convertible two-step 5/25 loan, your interest rate is fixed for the first five years, then converts into a fixed-rate loan for the ensuing 25 years. A nonconvertible 5/25 is reset after five years into a one-year ARM that adjusts annually for the next 25 years.

4) FHA LOANS

Available as one-year ARMs or 15- or 30-year fixed-rate mortgages, FHA loans are insured by the Federal Housing Administration and offer an attractively low down payment—as low as 3%. FHA loans have looser requirements; you may qualify for an FHA loan even if you have a past bankruptcy. FHA loans were created to help first-time buyers and others who may not qualify for other financial options, but there's no requirement that your income be below a certain level or that you be a first-time buyer. There are limits, however, to the amount you can borrow. A co-buyer doesn't have to live on the premises, as with most conventional loans. In fact, you can often pay your down payment with gift money. FHA loans can be assumed from the seller, which is attractive to future buyers. On the downside, they require very high mortgage insurance payments. In a hot seller's market, sellers are sometimes reluctant to work with FHA financing. There is usually more paperwork, which can slow down the process. Finally, an FHA loan can end up costing more than a conventional loan and some experts recommend that you first try qualifying for a conventional loan.

5) V.A. GUARANTEED LOANS

Only for veterans of the U.S. armed forces and in some cases their widows or widowers, these 30-year VA loans are guaranteed by the Department of Veterans Affairs. There's no monthly mortgage insurance premium, and in most cases no down payment is required. They include a choice of three repayment plans, including fixed-rate, and they usually have attractive lending terms. Prepayment is allowed without penalty, and the loans are assumable by other qualified veterans. Note that fees can be steep, including credit report, survey title, VA appraisal, loan-origination, and recording fees. Since 1981 there's also been a VA funding fee (with an exemption for veterans who receive compensation for disabilities). These loans aren't cheap, but they're useful if you're low on cash.

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