Types of Mortgages Available to You

There are four different types of refinance loans. These different loan types all have a benefit depending on your financial goals.

The most basic mortgage refinancing is the conventional fixed rate mortgage. This loan type is typically 30 years, but can also be set up as a 40 or 50 year loan. This is a loan that would make sense if you are planning on staying in the home long-term and want to pay the mortgage off in full over the course of the loan. The advantage of this loan type is that you are not continuously refinancing and paying closing costs each time going through the process. The payment will be fixed for the full term of the loan and every payment will have a portion that reduces your balance. Unfortunately, most loans are front-loaded with interest and you won’t see any significant principal reduction until after the first 7-10 years.

Probably the most popular loan type in the Arizona mortgage refinancing industry is the interest only loan. One reason for this is the population is always increasing and property values typically are rising. This allows the homeowner to build equity through home appreciation, rather than principal reduction in loan finance. Interest only loans require the borrower to make a minimum payment that only covers interest. This loan type typically carries a duration of 2 to 10 years before the remaining balance is refinanced or becomes a variable rate amortizing loan.

ARM loans are a short term solution which allows a borrower the benefit of a lower rate than they might have qualified for otherwise. These are typically 2-5 year teaser rates that become variable and most likely will increase after the ARM term expires. This loan type will allow for balance reduction as it is typically a principal and interest payment. This can be verified through the use of a loan calculator.

The last loan type is easily the most aggressive of the four and the most complex. It is called the Opt ARM and carries four different payment choices. It is also referred to as the “pick a payment” loan. The borrower has four options. The first payment option is based on a very low percentage of the balance amortized out over 30 years.(Usually between 1-2.5%). This means on a $300,000 balance, you can literally make a payment in the neighborhood of $1000. Unfortunately, the difference that would have covered the remaining interest on the payment is applied to the loan balance. This is basically a negatively amortizing payment. The second option is interest only. The third is a 15 year amortizing payment and the fourth a 30 year payment. This loan type works well for commission based employees who have fluctuating pay, or customers in an aggressive market that plan on a home appreciating at a rapid pace.

If you are in the market for an Arizona refinance, keep in mind that you literally have hundreds of different loans to choose from and most of them are variations of these different loan types.