Adjustable-rate mortgages include interest payments which shift during the loan’s term, depending on current market conditions. Typically, these loans carry a fixed-interest rate for a set period of time before adjusting.

Adjustable Rate Mortgages (ARM)s are loans whose interest rate can vary during the loan's term. These loans usually have a fixed interest rate for an initial period of time and then can adjust based on current market conditions. The initial rate on an ARM is lower than on a fixed rate mortgage which allows you to afford and hence purchase a more expensive home. Adjustable rate mortgages are usually amortized over a period of 30 years with the initial rate being fixed for anywhere from 1 month to 10 years. All ARM loans have a "margin" plus an "index." Margins on loans range from 1.75% to 3.5% depending on the index and the amount financed in relation to the property value. The index is the financial instrument that the ARM loan is tied to such as: 1-Year Treasury Security, LIBOR (London Interbank Offered Rate), Prime, 6-Month Certificate of Deposit (CD) and the 11th District Cost of Funds (COFI).

When the time comes for the ARM to adjust, the margin will be added to the index and typically rounded to the nearest 1/8 of one percent to arrive at the new interest rate. That rate will then be fixed for the next adjustment period. This adjustment can occur every year, but there are factors limiting how much the rates can adjust. These factors are called "caps". Suppose you had a "3/1 ARM" with an initial cap of 2%, a lifetime cap of 6%, and initial interest rate of 6.25%. The highest rate you could have in the fourth year would be 8.25%, and the highest rate you could have during the life of the loan would be 12.25%.

Some ARM loans have a conversion feature that would allow you to convert the loan from an adjustable rate to a fixed rate. There is a minimal charge to convert; however, the conversion rate is usually slightly higher than the market rate that the lender could provide you at that time by refinancing.

FHA home loans are mortgages which are insured by the Federal Housing Administration (FHA), allowing borrowers to get low mortgage rates with a minimal down payment.

FHA home loans are mortgage loans that are insured against default by the Federal Housing Administration (FHA). FHA loans are available for single family and multifamily homes. These home loans allow banks to continuously issue loans without much risk or capital requirements. The FHA doesn't issue loans or set interest rates, it just guarantees against default.

FHA loans allow individuals who may not qualify for a conventional mortgage obtain a loan, especially first time home buyers. These loans offer low minimum down payments, reasonable credit expectations, and flexible income requirements.

Interest only mortgages are home loans in which borrowers make monthly payments solely toward the interest accruing on the loan, rather than the principle, for a specified period of time.

A mortgage is called “Interest Only” when its monthly payment does not include the repayment of principal for a certain period of time. Interest Only loans are offered on fixed rate or adjustable rate mortgages as wells as on option ARMs. At the end of the interest only period, the loan becomes fully amortized, thus resulting in greatly increased monthly payments. The new payment will be larger than it would have been if it had been fully amortizing from the beginning. The longer the interest only period, the larger the new payment will be when the interest only period ends.

You won't build equity during the interest-only term, but it could help you close on the home you want instead of settling for the home you can afford.

Since you'll be qualified based on the interest-only payment and will likely refinance before the interest-only term expires anyway, it could be a way to effectively lease your dream home now and invest the principal portion of your payment elsewhere while realizing the tax advantages and appreciation that accompany homeownership.

As an example, if you borrow $250,000 at 6 percent, using a 30-year fixed-rate mortgage, your monthly payment would be $1,499. On the other hand, if you borrowed $250,000 at 6 percent, using a 30-year mortgage with a 5-year interest only payment plan, your monthly payment initially would be $1,250. This saves you $249 per month or $2,987 a year. However, when you reach year six, your monthly payments will jump to $1,611, or $361 more per month. Hopefully, your income will have jumped accordingly to support the higher payments or you have refinanced your loan by that time.

Mortgages with interest only payment options may save you money in the short-run, but they actually cost more over the 30-year term of the loan. However, most borrowers repay their mortgages well before the end of the full 30-year loan term.

Borrowers with sporadic incomes can benefit from interest-only mortgages. This is particularly the case if the mortgage is one that permits the borrower to pay more than interest-only. In this case, the borrower can pay interest-only during lean times and use bonuses or income spurts to pay down the principal.

This article includes a list of the most commonly used indexes by ARM lenders that affect ARM mortgage rates.

6-Month CD Rate

This index is the weekly average of secondary market interest rates on 6-month negotiable Certificates of Deposit. The interest rate on 6 month CD indexed ARM loans is usually adjusted every 6 months. Index changes on a weekly basis and can be volatile.

1-year T-Bill

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 1 year. This index is used on the majority of ARM loans. With the traditional one year adjustable rate mortgage loan, the interest rate is subject to change once each year. There are additional ARM loan programs available (Hybrid ARMs) for those that would like to take advantage of a low interest rate but would like a longer introductory period. The 3/1, 5/1, 7/1 and 10/1 ARM loans offer a fixed interest rate for a specified time (3,5,7,10 years) before they begin yearly adjustments. These programs will typically not have introductory rates as low as the one year ARM loan, however their rates are lower than the 30-year fixed mortgage. This index changes on a weekly basis and can be volatile.

3-year T-Note

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 3 years. This index is used on 3/3 ARM loans. The interest rate is adjusted every 3 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. The index changes on a weekly basis and can be volatile.

5-year T-Note

This index is the weekly average yield on U.S. Treasury securities adjusted to a constant maturity of 5 years. This index is used on 5/5 ARM loans. The interest rate is adjusted every 5 years on such loans. This type of loan program is good for those who like fewer interest rate adjustments. This index changes on a weekly basis and can be volatile.

Prime

The prime rate is the rate that banks charge their most credit-worthy customers for loans. The Prime Rate, as reported by the Federal Reserve, is the prime rate charged by the majority of large banks. When applying for a home equity loan, be sure to ask if the lender will be using its own prime rate, or the prime rate published by the Federal Reserve or the Wall Street Journal. This index usually changes in response to changes that the Federal Reserve makes to the Federal Funds and Discount Rates. Depending on economic conditions, this index can be volatile or not move for months at a time.

12 Moving Average of 1-year T-Bill

Twelve month moving average of the average monthly yield on U.S. Treasury securities (adjusted to a constant maturity of one year.). This index is sometimes used for ARM loans in lieu of the 1 year Treasury Constant Maturity (TCM) rate. Since this index is a 12 month moving average, it is less volatile than the 1 year TCM rate. This index changes on a monthly basis and is not very volatile.

Cost of Funds Index (COFI) - National

This Index is the monthly median cost of funds: interest (dividends) paid or accrued on deposits, FHLB (Federal Home Loan Bank) advances and on other borrowed money during a month as a percent of balances of deposits and borrowings at month end. The interest rate on Cost of Funds (COFI) indexed ARM loans is usually adjusted every 6 months. Index changes on a monthly basis and it not very volatile.

Cost of Funds Index (COFI) - 11th District

This index is the weighted-average interest rate paid by 11th Federal Home Loan Bank District savings institutions for savings and checking accounts, advances from the FHLB, and other sources of funds. The 11th District represents the savings institutions (savings & loan associations and savings banks) headquartered in Arizona, California and Nevada. Since the largest part of the Cost Of Funds index is interest paid on savings accounts, this index lags market interest rates in both uptrend and downtrend movements. As a result, ARMs tied to this index rise (and fall) more slowly than rates in general, which is good for you if rates are rising but not good if rates are falling.

LIBOR

L.I.B.O.R stands for the London Interbank Offered Rate, the interest rates that banks charge each other for overseas deposits of U.S. dollars. These rates are available in 1,3,6 and 12 month terms. The index used and the source of the index will vary by lender. Common sources used are the Wall Street Journal and FannieMae. The interest rate on many LIBOR indexed ARM loans is adjusted every 6 months. This index changes on a daily/weekly basis and can be extremely volatile.

National Average Contract Mortgage Rate (NACR)

This index is the national average contract mortgage rate for the purchase of previously occupied homes by combined lenders. This index changes on a monthly basis and it not very volatile.

Graduated Payment Mortgages are loans in which mortgage payments increase annually for a predetermined period of time (e.g. five or ten years) and becomes fixed for the remaining duration of the loan.

A graduated payment mortgage is a loan where the payment increases each year for a predetermined amount of time (such as 5 or 10 years), then becomes fixed for the remaining duration of the loan.

When interest rates are high, borrowers can use a graduated payment mortgage to increase their chances of qualifying for the loan because the initial payment is less. The downside of opting for an smaller initial payment is that the interest owed increases and the payment shortfall from the initial years of the loan is then added on to the loan, potentially leading to a situation called "negative amortization." Negative amortization occurs when the loan payment for any period is less than the interest charged over that period, resulting in an increase in the outstanding balance of the loan.

This type of loan is designed for investors seeking to purchase property without the traditional income verification processes. Unlike standard mortgages, No Doc loans require minimal documentation, not necessitating borrowers to provide income verification or employment history. Instead, lenders may accept alternative documentation, such as bank statements, to assess the borrower's ability to repay the loan.

This type of mortgage is particularly suited for investors who may have significant income but lack the conventional proof of income required by other loan types.

Alternative Income Documentation methods offer flexibility for borrowers who may not have traditional income verification forms like W-2s or consistent salary records. These methods are particularly useful for self-employed individuals, freelancers, or those with variable income.

WVOE Only: Written Verification of Employment (WVOE) is used to confirm a borrower's income directly from their employer. This method bypasses the need for traditional pay stubs by providing a formal document from the employer that verifies the employment status and income of the borrower. It's particularly useful for those who have a consistent source of income from employment but lack the standard documentation.

099 Only: For individuals who work as independent contractors or freelancers, income is often documented through 1099 forms received from clients for services rendered. Using only 1099 forms as income documentation allows lenders to assess a borrower's income based on the aggregate payment received from various sources without traditional employment verification.

P&L Only: Profit and Loss (P&L) statements document the income and expenses related to a borrower's business operations. For self-employed individuals, a P&L statement can serve as a comprehensive overview of their business's financial health over a specific period. This method allows lenders to evaluate a borrower's income based on the net profits of their business operations, offering a holistic view of financial stability without traditional income verification.

Asset Utilization mortgages allow borrowers to leverage their liquid assets as proof of income to qualify for a loan.

This type of mortgage is especially beneficial for individuals who may not have a traditional income stream but possess significant assets. By calculating the potential income generated from these assets, lenders can assess a borrower's ability to repay the mortgage.

This approach makes it possible for those with high asset values but irregular income patterns, such as retirees or entrepreneurs, to secure financing for a home purchase.

A Commercial Real Estate (CRE) Loan is designed for the acquisition, development, or upgrade of commercial properties. This includes office buildings, shopping centers, industrial warehouses, and other commercial spaces. CRE loans are typically secured by a lien on the commercial property, with terms and rates that vary based on the project's risk assessment. These loans are fundamental for businesses and investors looking to expand or start their commercial real estate ventures.

Mixed-use loans are financing options specifically designed for properties that incorporate both residential and commercial units, such as a building with retail shops on the ground floor and apartments above. These loans can be commercial, short-term, or government-backed, depending on the lender and the specific characteristics of the property.

Mixed-use loans offer flexibility for property owners and investors looking to finance buildings that serve dual purposes, combining elements of residential and commercial financing strategies.

Interest-only mortgages are a specific type of home loan where the borrower is required to pay only the interest on the principal balance for a set period at the beginning of the loan term. During this phase, the principal balance remains unchanged.

This option can lower monthly payments in the short term but will require higher payments later on when the borrower starts to pay off the principal amount as well. It's a strategy that can be advantageous for borrowers with fluctuating incomes or those who plan to sell the property before the interest-only period ends.

Obtaining a mortgage one year out of bankruptcy refers to the eligibility to apply for certain types of home loans relatively soon after being discharged from bankruptcy, particularly Chapter 13.

While traditional mortgage options like conventional, FHA, VA, or USDA loans typically require a waiting period of one to four years post-bankruptcy, some loan programs may allow borrowers to qualify for a mortgage as early as one year after bankruptcy, depending on the circumstances of the bankruptcy and the borrower's financial recovery.

Manual underwriting involves a more hands-on review process for government-backed loans, such as FHA, VA, or USDA loans, when borrowers do not meet the standard automated underwriting criteria.

This process allows underwriters to take a closer look at the borrower's financial situation, including credit history, employment, income, and debts, to make a more informed lending decision. It's particularly beneficial for borrowers with unique financial profiles or those recovering from financial hardships.