The 3 types of loans are: 1. Fixed for Term, 2. Intermediate Fixed, 3. Variable

The 3 types of payments are: 1. Fully Amortized, 2. Interest Only, 3. Fixed Payment

Loan Types: Loans are best organized by whether the interest rate is fixed, and if so, for how long. The categories are:

• Fixed for Term—The interest rate on this group of loans is set at the beginning and does not change for the life of the loan. Fixed rate loans can be spread over 15, 20 or 30 years. The payments are calculated to be the same amount every month until the loan is paid off. The shorter the amortization period, the higher the payment because there is less time to pay back the loan in full. In recent years, it has become possible to get a loan with a rate that is fixed for 30 years, and still have the option to make interest only payments for the first 10 to 15 years.



• Intermediate Fixed—The interest rate on this group of loans is fixed for a certain amount of time in the beginning, after which the rate becomes variable. These loans are usually amortized over 30 years and sometimes 40 years. The initial fixed rate period can be 2, 3, 5, 7, or 10 years. At the beginning of the loan, a formula is established for determining what the interest rate will be when the initial fixed rate period ends. Even though you can't know in advance what the rate will be when the loan becomes variable, you can know exactly how the rate will be determined. Intermediate fixed loans frequently have an option to make interest only payments during the initial fixed rate period. The interest only payment option ends when the fixed rate period ends and the rate on the loan becomes variable.



• Variable Rate Loans—The interest rate on this last group of loans is not fixed but varies according to changes that may occur in the financial markets, specifically, changes made to monetary policy by the Federal Reserve. Variable rate loans have a formula established in the beginning to determine what the interest rate will be at any given time. The formula is the sum of an index (the part that moves) and a margin (the part that is constant). The index is not controlled by the lender - it is an objective standard that is published and available to anyone. Variable rate loans frequently contain rules about how much the interest rate can change, over what period of time, and what the maximum rate could be no matter what happens to the index. Despite moving up and down, the average rate on a variable rate loan has been lower than the average rate on fixed rate loans for the last 10 years.

Payment Types: You have choices about how your monthly payment is calculated

• Fully Amortized payments are the conventional method of calculating how a loan will be repaid. All payments over the life of the loan are the same amount. Each payment includes both repayment of the principal you borrowed, and the interest that accrued on the loan since the last payment. Each month, as you pay down the principal balance, the amount of interest that accrues the next month is less and less. Therefore, with each payment made, a lesser proportion of the payment is interest and a greater proportion of the payment is principal until the loan is paid in full. Many people consider fully amortized payments to be “safe” or “responsible” but higher monthly payments also impose a high opportunity cost by reducing your monthly cash flow. Fully-amortized payments are available for all 3 types of loans - fixed, intermediate fixed and variable.



• Interest Only payments are just that—payment of the interest that accrued on the loan since the last payment and no more. When you make an interest only payment, your loan balance remains the same from month to month. Interest only payments provide you with increased monthly cash flow and you maintain a valuable tax deduction by not eroding your principal balance. Interest only payments are also available on all 3 types of loans - fixed, intermediate fixed and variable.



• Fixed Payment. This last payment type deserves careful consideration. Fixed payments are frequently much lower than traditional payments. They differ from fully amortized and interest only payments because a fixed payment is not directly related to the interest rate on the loan. The interest rate and the payment schedule are independent from each other. Depending on the general level of interest rates, the fixed payment may include both principal and interest or it may represent only a portion of the interest that accrues in the previous month. A loan with fixed payments can offer you important advantages because you can control real estate with fewer dollars per month. With increased monthly cash flow, you have opportunities that are not available when you commit to a higher monthly payment. The concept of fixed payments applies only to variable rate loans.

The table below summarizes the various types of loans and payment combinations:

	Fully Amortized	Interest Only	Fixed Payment
Rate Fixed for Term	yes	yes	no*
Intermediate Fixed Rate	yes	yes	no
Variable Rate	yes	yes	yes

What's the right choice for you? Each type of loan and each type of payment serves different people with different needs and values. There are important strategic reasons to consider each type of loan and payment. For more guidance on how to make the right choice for you, please see How to Select the Right Loan or simply contact our office.


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