Lenders may have several loan packages that vary in length of the loan, interest rate, and other particulars. The two most conventional loans are the fixed-rate mortgage (for fifteen, twenty, twenty-five, or thirty years) and the adjustable-rate mortgage (ARM). A fixed-rate mortgage, as the name suggests, has a fixed interest rate. ARMs are mortgages whose interest rates change over the life of the loan. They typically offer a “teaser” low interest rate at the outset of the loan three or more percentage points lower than a fixed-rate loan, but that figure can rise dramatically after the first year, and it usually continues to rise steadily thereafter.

Fixed-rate mortgages are the most traditional mortgages. They feature a fixed interest rate over a fixed term, making the monthly payments the same over the entire term of the loan. Fixed-rate mortgages are usually for either fifteen or thirty years. A variation on this mortgage type is the balloon mortgage. It will usually have a fixed rate and a fixed monthly payment; however, it spans a shorter timeframe — usually three to ten years. While the payments may be based on a thirty-year term, at the end of the balloon term, you must either pay off the remaining debt or apply for another mortgage.

Interest rates that lenders charge for ARMs are pegged to an independent financial index they select. There are many choices of index here, carrying a variety of components. To protect homebuyers from large rate increases, most lenders set limits on the amount rates may fluctuate at the time for a loan's interest rate to be determined. This is known as the adjustable-rate cap. With a lifetime cap, lenders set a ceiling and floor for rate increases and decreases over the life of an ARM. The lifetime cap is expressed either as a particular percentage rate or as five to seven percentage points over or under that initial rate. Be sure to ask about caps when you inquire about ARMs.

Some borrowers these days are opting for fifteen-year loans in place of the more traditional thirty-year term, both to build equity faster and to save thousands of dollars in finance charges. Fifteen-year loans may be a little harder to secure than thirty-year terms because the monthly payments are higher, which means you'll need a higher income to qualify than you would to qualify for a thirty-year mortgage. However, your payments are not 50 percent higher than they would be with thirty-year mortgages; they are usually only 20–30 percent above that amount, because more of each monthly payment goes toward principal and less toward interest. Additionally, some lenders will allow you to convert an ARM to a fixed-rate plan at some point down the road. This is beneficial if interest rates drop significantly and you wish to lock in a low rate.

Table 4.2 Percent of Home Financed by First Time and Repeat Buyers

Source: National Association of Realtors Profile of Buyers and Sellers 2007

A slightly different variation of a loan is a balloon mortgage. When you take on a balloon loan, you agree to make a fixed monthly payment that will amortize (or repay) your loan over, say, thirty years. On a specified date — five, seven, ten, or any other predetermined number of years in the future — the entire unpaid balance of the loan becomes due and payable. At that point, you can either pay off the loan with your own money or refinance the home with another loan. Otherwise, you risk losing the property.