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A Fixed rate mortgage is when your interest rate and monthly payments will remain the same for the entire life of your loan. Fixed rate mortgages are offered in a variety of terms: 30 and 15 years being the most common. The 15 year term usually has an interest rate of about 1/2 point lower than the 30 year term. There are also a few variations of the traditional fixed rate mortgage such as a graduated payment mortgage. Graduated payment loans allow you to pay less at the beginning of the loan and then increase your payments as the loan matures.
Adjustable rate mortgages (ARM) are another common type of mortgage. These types of mortgages start at a low interest rate and then adjust based on a selected index. There are many different types of economic indicators that can be used as an index: 6 Month treasury, 3yr treasury, 5yr treasury, COFI, FHLBB, or LIBOR. Adjustable rate mortgages offer a variety of repayment terms: 10/1, 7/1, 7/23, 5/25, and 5/5. A 10/1 year adjustable rate mortgage will have the same interest and monthly payment for the first 10 years. At the beginning of the 11th year, interest rate will be adjusted each year and the payment will change accordingly. Be sure to check with your mortgage broker or banker to find out the yearly and lifetime cap of your ARM. There will be a maximum amount the rate can go up per year, and there will be a maximum amount the rate can go up for the life of the loan.
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