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It is frequently seen that the two basic types of amortized loans used by the public are the Fixed Rate Mortgage ( FRM ) and the Adjustable Rate Mortgage ( ARM ).
However, there are many others rarely used such as “assumed mortgage”, “blanket loan”, commercial loan”, “deed of trust”, “equity loan”, “jumbo loan”, and more. But, we will describe the two basic ones here.
In a fixed rate mortgage, the interest rate, and consequently monthly payment, remains fixed for the terms of the loan which may be for 10, 15, 20, 30 and in rare cases even more.
Payments for interest rate are fixed for an specific period of time, subsequent to which it will be adjusted up or down annually or monthly to some market index.
Adjustable rates transfer can be described as a part of the interest rate risk from the lender to the borrower, and hence are extensively used where unpredictable interest rates make fixed rate loans hard to obtain.
Since the risk is transferred, lenders should make a note on the initial interest rate of the ARM from 0,5% to 2% than the standard 30-year fixed rate. In the majority of these scenarios, the savings from an ARM compensate its risks, making them an attractive choice for people who are scheduling to maintain a 10-years mortgage or less.
Furthermore, lenders rely on credit reports and credit scores resulting from them. The higher the score is, the more creditworthy the borrower is assumed to be.
Good interest rates are usually presented to home buyers with high scores. Lower scores show higher risk to the lender in almost all cases, and lenders call for higher interest rates in such situation to compensate for augmented risk.
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