If you're obtaining a mortgage and contemplating whether to get a traditional home loan or adjustable rate mortgage (ARM), there are definitely some things you'll want to consider.

Before deciding on either, you'll want to understand the dynamics and look into the advantages and disadvantages of each. Some considerations to keep in mind are how long you intend on keeping the home; whether one of your intentions in buying a home is to build credit and what will give you the best annual percentage rate (APR) in the beginning and throughout the lifetime of the loan.

Traditional home loans are typically known as fixed rate mortgages (FRMs). The most popular FRM, a longer term mortgage, has the following characteristics:

* Payments are fixed throughout the term of the loan
* Are available from 15 to 40 years, in 5 year increments
* The shorter the loan term, the lower the interest rate
* The shorter the loan term, the less interest you will pay over the life of the loan
* The bulk of loan payments go to interest in the beginning of the loan
* There are penalties for early payoff on some FRMs - ask your lender

Included in FRMs is the balloon loan, a short-term, fixed-rate mortgage. The balloon loan has some advantages in that the interest is typically much lower and you have lower monthly payments than on a 15- to 40-year term loan. The terms are usually from 3 to 7 years, but you are required to pay the remaining balance in full at the end of the term.

If you are considering a balloon loan and think you will be keeping the home for a long period of time, obtain one with a refinancing option. Certain conditions will have to be met, but it allows you to convert the remaining balance of the loan into a longer fixed-rate mortgage at the end of the term without going through the buying process again.

With the caveat of the refinancing option, you don't have to go through another credit check or reapproval of the property. The interest assigned to the new loan will be at the current market rate at the time it is converted. A processing fee may be required when obtaining the new loan. You'll want to ask about this long before you agree to the balloon loan.

ARMs, on the other hand, provide you with a broad array of options, advantages and disadvantages. Similar to a balloon loan, the payments and interest rate are typically lower in the beginning of the ARM term. Periodic assessments are made throughout the lifetime of the loan, which can lower or raise your interest rate and monthly payment.

Keep in mind, interest rates typically are higher at the first assessment of the loan and often continue to rise. These kinds of loans, however, commonly have caps that put a ceiling on your maximum monthly payment that can be required of you throughout the lifetime of the loan. The excess will simply be added to the principal of your loan, which could extend the lifetime of your loan.

ARMs option ARMs are also available, can be very complex loans, so you'll want to understand the conditions of the loan, along with terminology applicable to the loan. Ask your lender prior to committing to an ARM about the advantages and disadvantages.

Generally, ARMS are best suited for those who are making an investment where rents are low and property values are high. This option allows you more cash flow. They also often benefit seasonal workers and those who own businesses where the revenues fluctuate.

Keep in mind, the interest rate on an ARM can adjust as soon as one month from the loan's inception, depending on the conditions of the loan. Some terminology to ask about and pay close attention to is:

* Lifetime cap limit
* Index
* Margin
* Periodic or adjustment cap limit
* Interest rate cap
* Loan recast
* Minimum payment factor

General advantages from a traditional mortgage are that you have significantly more flexible payment options and your monthly payments at the onset of your loan are much lower. One disadvantage is that if you only pay the minimum payment due monthly, your loan will recast at some point and your lender will recalculate your loan payments over the next 30 years based on your remaining balance. This could drastically raise your monthly loan payment.

Again, ask your lender as many questions as you can think of. Compare terms, advantages and disadvantages of each. Make sure you understand the terminology used and conditions prior to agreeing and signing to any loan.

Ki lives and works as a realtor in the Austin real estate market. There is comprehensive Austin home search on his website. His website also has detailed information on Austin real estate and a mortgage calculator widget.

This is getting just ridiculous. This is now the 12th week in a row where mortgage rates have fallen. Ok one small caveat to that this is the 12th week where the 30 year mortgage rate has fallen. But in the current environment the 30 year mortgage rate is almost the only mortgage product that matters. The 30 year rate fell this week from 5.01 to 4.96. The 5 year arm fell (from 5.49 to 5.25) and the 1 year arm declined slightly (from 4.95 to 4.89). But frankly who cares, as long as these rates stay above the 30 year mortgage (i.e. the 5 year arm) or just slightly below the 30 year mortgage (the 1 year arm) there is no real reason to consider these mortgage products. Rates for a 15 year mortgage rose slightly from 4.62 to 4.65. Below are rates for the last few weeks.

Jan 15, 2008
30-yr 4.96 15-yr 4.65 5-yr ARM 5.25 1-yr ARM 4.89

Jan 08, 2008
30-yr 5.01 15-yr 4.62 5-yr ARM 5.49 1-yr ARM 4.95

Dec 31, 2008
30-yr 5.10 15-yr 4.83 5-yr ARM 5.57 1-yr ARM 4.85

Dec 24, 2008
30-yr 5.14 15-yr 4.91 5-yr ARM 5.49 1-yr ARM 4.95

Dec 18, 2008
30-yr 5.19 15-yr 4.92 5-yr ARM 5.60 1-yr ARM 4.94

So I wanted to look at actual mortgage payments in addition to mortgage rates. When we talk of rates dropping sometimes its interesting to translate those rate drops into real dollars. We translated today's rates into a mortgage payment for a 200k loan. We also looked at rates from two weeks ago and rates from October 30th (this was the date when rates first started to fall).

Jan 15
30-yr $1068.75
15-yr $1545.36
5-yr ARM $1104.4
1-yr ARM $1060.23

Dec 31
30-yr $1085.89
15-yr $1563.93
5-yr ARM $1144.37
1-yr ARM $1055.38

Oct 30th
30-yr $1258.87
15-yr $1708.31
5-yr ARM $1245.77
1-yr ARM $1120.56

So if we look at what mortgage payments would be today compared to October 30th is fairly apparent that rates and correspondingly mortgage payments have plummeted. For a 30 year mortgage on a 200k loan the payment has come down from $1258.87 to $1068.75. That is a drop of $190.12 or 15.1%. That is a pretty huge drop in a few months.

So what is going to happen moving forward. Rates can obviously not continue to go down week after week. At this point I think there is a bigger risk of rates going up than going down. I would be surprised if rates continue to go down for 3 or 4 more weeks. In the next few months I would expect rates to continue to hover around 5 percent plus or minus half a point. Basically the government is going to do whatever possible to keep rates low. In the next two or three years its expected interest rates will rise dramatically. All the money that has been pushed into the economy will at some point increase inflation and this will in turn push up mortgage rates.


Ki writes regularly about mortgage rates and the mortgage industry. His site has a search of the Austin MLS along with a mortgage calculator widget