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Contact UsUnderstanding Mortgage Types
Most first-time homebuyers don’t realize how many different types of mortgages are available. The difference between mortgage types isn’t just in the APR offered. The risk level and flexibility of mortgages can make one much more suitable for you. Here is an overview of the main mortgage types and who they best suit.
Fixed Rate Mortgages
Fixed rate mortgages have a set interest rate and monthly payment amount which will not change for the entire duration of the loan. Fixed rate mortgages are amortized, meaning that each payment goes towards interest and principal so that, over the course of payments, your debt shrinks until the loan is completely paid off.
The duration of the fixed rate mortgage will affect the interest rate. The shorter the period (such as 5 or 10 years), the lower the interest rate will be.
Fixed rate mortgages are ideal for buyers who plan on staying in the same property for a long period of time. They are also ideal for people who prefer the security of set interest and payments, especially if they think interest rates will increase.
Adjustable Rate Mortgages (ARMs)
Adjustable rate mortgages have an interest rate that periodically changes based on the Federal Reserve’s rate adjustments. These changes usually occur every 3 to 5 years, affecting your monthly payment amount accordingly.
ARMs typically offer lower initial APRs compared to fixed-rate mortgages. If interest rates stay stable or decrease, an ARM can be significantly more cost-effective. However, there is always the risk that rates and therefore payments could rise.
ARM mortgages are ideal for buyers planning to stay in a home for a shorter period (under 5 years) or those who believe interest rates will drop and are comfortable with the potential risk.
Hybrid Mortgages
A hybrid mortgage combines both a fixed-rate and an adjustable-rate mortgage. For an initial period, the loan remains at a fixed interest rate. Once that period ends, it converts into an ARM, with rates adjusting periodically after that.
Hybrid mortgages are usually expressed as ratios such as 3/1. The first number represents the number of years the rate stays fixed, while the second number shows how often the rate adjusts once the fixed period ends. These mortgages often have better starting rates than fixed-rate loans and slightly higher rates than ARMs.
Hybrid mortgages are ideal for buyers planning to stay in their home for a medium length of time (5–10 years). They offer a balance of stability during the fixed period and potential savings after, making them a smart option for flexible homeowners.
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