The two most common types of mortgages are:
- “fixed rate mortgages (FRM)”- Fixed-rate loans typically have repayment terms of 15, 20, or 30 years. Both the interest rate and the monthly payments (for principal and interest) stay the same during the life of the loan.
- “adjustable-rate mortgages (ARM)”- Adjustable-rate loans, also known as variable-rate loans, usually offer a lower initial interest rate than fixed-rate loans. The interest rate fluctuates over the life of the loan based on market conditions, but the loan agreement generally sets maximum and minimum rates. When interest rates rise, generally so do your loan payments; and when interest rates fall, your monthly payments may be lowered.
Adjustable-rate mortgages are also known as floating rate or variable rate mortgages.
Combinations of fixed and floating rate mortgages have also become a common practice. These combination mortgages will have a fixed rate for a period of time, and then vary after that specified time period expires.