The different products for mortgages are created like refinancing, home mortgage loans,
reverse mortgage so that each borrower has options to match their financial situation to the loan on their home. The difference between ARMs and fixed rate mortgage products is basically that fixed loans have one rate for their entire term or amortization schedule. A 30-year fixed loan means that you will pay the set interest rate for the life of the loan.
An Adjustable Rate Mortgage will have the rate of payment set for a period of time- detailed in the name of the ARM product, and after that set period, the rates will be tied to an Index. An example is that with a 3/1 ARM, the amortization is calculated from the term of the loan (typically 30 years) and the first 3 years or 36 months of the loan will be at a an exact rate. After the initial period, the rates will change according to changes in the Index that the loan is tied with, i.e. London Interbank Exchange (LIBOR), Monthly Treasury Average (MTA), etc. Most of these rates have a cap how high they can increase to in each year and over the life of the loan. Typically rates are lower for adjustable rate mortgages during the fixed portion of the loan than fixed rate loans.
The interest only mortgage loan is a way to decrease the monthly payment on a fixed or Adjustable rate mortgage. On a fully amortized loan, part of the payment goes toward Principal and part goes to Interest.
The main difference with an Interest only loan is that no money in the monthly payment pays down the Principal amount of the loan. Basically, a loan for $100,000.00 will stay at $100,000.00 until a borrower actively pays toward principal. This lessens the monthly debt to be paid on a mortgage. At some point in the loan, the principal will start to be paid off and this means that there will be an acceleration of the amount needed to be paid each month. An example is that a 30 year amortization with the first 10 years as Interest only will minimize payments for 10 years, but in year 11, the entire amount of the loan will start to pay down, which means that the loan will be due in 20 years and the monthly payment will be much higher.
Adjustable rate mortgages typically have a set rate for a number of years. The most typical fixed number of years for ARM rates are for 1, 3, 5, 7 or 10 years. Normally, the rates are higher for the longer the term of the fixed part of the loan. A borrower should base their ARM term on their time horizon for the loan and/or home. If you are only going to live in a house for 5 years, then there is no reason to have a 10-year ARM because the rate will be higher for a 10-year ARM mortgage.
10,15,30,40,50-year amortizations are the length of the payment period, or term, of a mortgage. The shorter the term, the lower the rate and the less over the life of the loan that you will pay in total on a mortgage. However, this means that you will accelerate the pay scale for your loan. Each month will be a greater debt load with a short-term mortgage. In other words, a 15-year mortgage will have a higher monthly payment due than a 30-year mortgage, but this will mean that the mortgage is paid off in one-half of the time. The 30-year mortgage will have a lot more money paid toward interest and not principal, and is not the preferred payment schedule. This is offset by the higher monthly payment that is more money out of pocket each month.
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