Mortgage calculation

For many first time home buyers, deciding on the right mortgage program can be overwhelming. There was a time when choosing a mortage was a fairly simple process. A borrower had the choice of one of two options: a fixed or adjustable rate. Times have definitely changed. There are now hundreds of different mortgage programs out there to choose from.

Basic Mortgage Loan Types

There are basically two categories that most mortgage loans fall into: fixed or adjustable rate. The two types are very different and work for different borrowers.

Fixed Rate (FRM)
A fixed rate mortgage is a loan with an interest rate that remains the same throughout the term of the loan. Payments made by the borrower may change over time with a changing escrow amount (tax and insurance rate changes), but the payments handling the principal and interest on the loan will remain the same.

Adjustable Rate (ARM)
An adjustable rate mortgage, also know as a variable rate or floating rate mortgage is a loan with a periodically adjusted interest rate based on an index. This ensures a steady margin for the lender, whose own cost of funding will be related to the index. Payments made by the borrower will change over time (based on the terms of the loan) with the changing interest rate.

Common Mortgage Programs

Here’s an overview of just some of the various mortgages programs that are available along with their basic characteristics.

Fixed Rate Mortgage
This type of loan is good if you are planning to live in your home for at least 10 years or more and like total payment stability. The interest rate & monthly payment will remain the same for the duration of the loan - 30,10,15,10 years.

10/1 Year Adjustable Rate
If you plan to live in the house for more than 10 years, want to start with initial payments remaining the same but can handle changes to the payment after 10 years - consider this loan. On the 11th year, the interest rate adjusts every year and payments are subject to change for the duration of the loan.

30 Due In 7
This program is good if you can handle one payment adjustment or plan to move within 7 years. The mortgage interest rate & monthly payment will remain the same for 7 years. Conversion option: On the 8th year, interest rate will adjust to reflect the going interest rates. The resulting payment would remain the same for the duration of the loan.

7/1 Year - Adjustable Rate
If you are planning to live in the house more than 7 years, like initial payment stability and can handle later changes, you may want to consider this loan. The mortgage interest rate & monthly payment remain the same for 7 years. On the 8th year, the interest rate adjusts every year and payments are subject to change for the duration of the loan.

7 Year Balloon Mortgage
If you’re willing to refinance at the going market rate, like payment stability or plan to move with 7 years, this type of loan is for you. The interest rate & monthly payment remain the same for 7 years. At the end of 7 years, the loan becomes due in full. You would need to refinance into a new loan at the going interest rates.

30 due in 5
This loan program works if you’re planning to move within 5 years or can handle one payment adjustment. The mortgage interest rate & monthly payment remain the same for 5 years. Conversion option: On the 6th year, the interest rate adjusts to reflect the going interest rates. The resulting payment would remain the same for the duration of the loan.

5/1 Year Adjustable Rate
If you like initial payment stability, can accept later changes or are planning to move within 5 years, you may want to consider this loan. The mortgage interest rate & monthly payment remain the same for 5 years. On the 6th year, the interest rate is adjusted every 5 years (for 5/5 ARM) and every year (for 5/1 ARM).

5 Year Balloon
If you are willing to refinance at the going market rates, plan to move within 5 years, and/or like payment stability - this loan may be for you. The mortgage interest rate & monthly payment remain the same for 5 years. At the end of 5 years when the loan is due in full, you would need to refinance into a new loan - at the going interest rate.

1 Year Adjustable Rate
If you can’t qualify at higher rate programs, want to take advantage of the lowest rate possible and are willing to accept payment changes, then consider this loan program. The mortgage interest rate will adjust yearly, so the monthly payment is subject to change annually for the duration of the 30 year loan term.