Mortgage Loans

Fixed Rate Mortgage

A fixed rate mortgage is a loan that has an interest rate that is fixed for the entire term of the loan. This means that the monthly payment of principal and interest will remain the same until the loan is paid off. Fannie Mae requires fixed rate loans to be fully amortizing which means that at the end of the loan term, the loan will have been paid in full. Fixed rate mortgage loan products are available in a variety of terms ranging from 10 years to 40 years. The most popular product is the 30-year fixed rate loan.

Adjustable Rate Mortgage

An adjustable rate mortgage has an interest rate and monthly payment that is not fixed for the life of the loan but adjusts periodically to correspond with changes in the index to which the interest rate is tied. There are a wide variety of ARM products on the market but most ARMs have the following characteristics.

Common Characteristics:

  • An initial fixed rate period during which the interest rate will not change. The initial fixed rate period can be 1, 3, 5, 7 or 10 years.
  • After the initial fixed rate period, the interest rate will adjust with a specified frequency.
  • An index and margin are used to determine the interest rate after the initial fixed rate period.
  • Periodic caps on interest rate adjustments which include limitations on interest rate increases and decreases.
  • A lifetime interest rate cap.
  • The interest rate can never decrease below the predetermined margin.
  • A look-back period for determining the index value for interest rate adjustments.


A 7/1 ARM has an initial interest rate that is fixed for 7 years and thereafter adjusts every 12 months (1 year). This means that the interest rate can go up or down when the 7 year fixed rate period expires and can adjust again every 12 months thereafter. The "7" in "7/1 ARM" refers to the initial fixed rate period of 7 years and the "1" refers to the adjustment interval after the fixed rate period ends.

A 5/5 ARM has an initial interest rate that is fixed for 5 years and thereafter adjusts every 60 months. With a 5/5 ARM, the interest rate can only be adjusted every 5 years.

The cap structure of an ARM is sometimes expressed as initial adjustment cap / subsequent adjustment cap / life cap. For example, with a 5/1/5 ARM, the initial interest rate can adjust (increase or decrease) by up to 5 percentage points when the initial fixed rate period expires and thereafter adjustments are limited to 1 percentage point provided that at no time can the interest rate be more that 5 percentage points above the initial interest rate.

Home Equity Line of Credit

A Home Equity Line of Credit (HELOC) is a form of revolving credit in which an individual's home serves as collateral. A HELOC can be used for home improvements but also to pay for items that are unrelated to the home such as medical bills and college tuition.

Maximum Credit Amount. With a HELOC, the borrower is approved for a specific amount of credit. Like a credit card, there is a maximum amount that the borrower can draw on. Lenders typically set a maximum percentage of the home's appraised value that they are willing to lend on. For example, if a lender's HCLTV ratio is 75%, the appraised value of the home is $100,000 and there are outstanding first and second mortgages with a total loan balance of $50,000, then the maximum HELOC amount that the borrower could qualify for is $25,000. Whether a borrower will qualify for the maximum credit amount depends on the borrower's overall financial picture and ability to repay as may be indicated by the borrower's income, debts, other financial obligations and credit history.

Repayment Term. Most HELOCs set a fixed period during which the credit can be drawn. Some HELOCs require repayment of all drawn amount at the end of the draw period while other plans allow repayment over a fixed period after the draw period expires.

Limitations on Use. Once approved for a HELOC, a borrower would most likely be able to draw up to the credit limit at any time by using special checks or a credit card. Some plans, however, may require a minimum amount per draw or may require that a certain minimum amount be kept outstanding or may require that an initial advance be taken at the time the credit line is set up.

FHA Loans

The Federal Housing Administration (FHA) administers various single family insurance programs. These programs operate through FHA-approved lending institutions which submit applications to have the property appraised and have the buyer's credit approved. These lenders fund the mortgage loans which the Department insures. HUD does not make direct loans to help people buy homes and does not set interest rates on the mortgages it insures.

FHA's single family insurance programs are generally limited to owner-occupied principal residences.

The following are widely used FHA single family mortgage insurance programs:

  • 203(b) Mortgage Insurance for One-to-Four Single Family Homes. This program is the centerpiece of FHA's single-family mortgage insurance programs and is the most commonly used program. It may be used to purchase or refinance a new or existing one-to-four family home. Typically, lenders offer terms at 15 or 30 years.
  • Section 234(c) Single Family Mortgage Insurance for Condominium Units. This program can be used to buy a unit in a condominium building if the condominium project is approved for participation under FHA guidelines. Find out if your condominium complex is FHA approved.
  • Section 251 Adjustable Rate Mortgage (ARM). This program provides insurance for adjustable rate mortgages and sets limits on rate increases. The 1- and 3-year ARMs allow a one percentage point annual interest rate adjustment after the initial fixed interest rate period and a five percentage point interest rate cap over the life of the loan. The 5-, 7- and 10-year ARMS allow a two percentage points annual interest rate adjustment after the initial fixed rate period and a six percentage point interest rate cap over the life of the loan. Special rules apply for refinancing to and from ARM loans.
  • Section 203(k) Single Family Rehabilitation Mortgage Insurance. This program is for the rehabilitation and repair of single family properties. It enables a buyer to borrow money for the acquisition of the home and to borrow money for making the required repairs and close on the loan before the repairs are made. The portion of the loan that is for rehabilitation costs is placed into a rehabilitation escrow account and the repairs are made after the close of escrow with the lender releasing the funds to pay for the repairs in phases as the repair work is completed. Under this program, a loan can be also be obtained for refinancing the existing indebtedness on the property and rehabilitation of the property or can be obtained to finance rehabilitation costs only. A streamlined version of this program is also available. The Streamlined 203(k) Limited Repair Program version limits rehabilitation cost financing for homebuyers to improve or upgrade their home before move-in to $35,000.

VA Loans

The Servicemen's Readjustment Act of 1944, commonly known as the GI Bill of Rights, was signed into law by Franklin D. Roosevelt on June 22, 1944. It made provisions for the guarantee by the federal government not to exceed 50% of certain loans made to veterans for the purchase of homes. The maximum loan amount throughout the United States is $417,000 and the loan must be a fixed rate mortgage with a 15- or 30-year term. This program is available only to veterans and their spouses and allows veterans to purchase a home with no money down and very liberal qualifying ratios. There is no monthly mortgage insurance premium but a funding fee is required. The funding fee is financeable and is equal to 1.40% of the loan amount (or 1.65% for reserves/national guard) for first-time buyers or 2.80% for repeat users with zero down. More information on VA loans.