How to Refinance: Choosing the Right Home Loan

• 15-, 30-, and 40-year fixed rate mortgages: These are fully amortized (principal and interest) mortgage products with a fixed interest rate for the term of the loan.
• Adjustable rate mortgage (ARM): These have a fixed interest rate for a set term between one and 10 years. Then the interest rate will adjust up or down depending on market conditions.
• Interest-only mortgages: These can be fixed rate mortgages or ARM products. The mortgage payment does not include a principal payment, only interest. These mortgages are usually interest-only for 10 years and then become fully amortized.
• Option ARMs: These are also known as negative amortization loans, and can start with interest rates as low as 1%. The real interest rate on the home loan, however, is the current market interest rate. Whenever the current market interest rate is not paid, the difference between the two payments is added to the home loan balance. The borrower has the "option" of paying a reduced payment (the 1%), an interest-only payment, or a fully amortized payment.
• Home Equity Line of Credit: Used like revolving credit, a HELOC is an interest-only second mortgage based on the prime interest rate. Borrowers only pay interest on the amount drawn and can repeatedly pay it back and borrow against it. HELOCs are interest-only for 10 years and then become fully amortized.
• Home Equity Loan: A fully amortized, fixed rate second mortgage, usually a 30-year due in 15 years (with a balloon payment at the end of those 15 years).