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# The low-down on loans
- URL: https://www.smdp.com/the-low-down-on-loans/
- Published: 2006-08-09T15:00:00.000Z
- Updated: 2026-10-25T00:34:37.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By MIKE HEAYN*

When it comes to buying a house you should know what loan options exist. In the last few years many different types of “exotic” loans have come into existence, but residential real estate loans breakdown into three categories — “adjustable”, “fixed” or “hybrid”, with one exotic called “interest only” that needs mentioning.

When it comes to buying a house, you need to figure out what type of real estate financing works best for your needs. One type of loan called an “adjustable rate mortgage” (ARM) could start you at a low interest rate.An ARM loan is designed to start at a low rate and increase or decrease, depending on the market, over time. It consists of a margin and index. Also known as a spread, a margin is the percentage of the interest rate that the lender takes as his profit. For the most part, a margin will stay constant over the life of the loan. However, the index does change over time. An index is a published rate of investments, such as securities, which measures changes in the economy or financial markets. Adjusting monthly, quarterly, bi-annually, or annually, ARM payments change over time with the adjustment of the index. Although the start rate for an ARM is low and may appeal to a first-time home buyer, the risk of a higher payment in the future should be considered. The benefit to an adjustable rate mortgage loan is for someone who is going to be out of a property in a short time, such as a property rehabber or flipper.

A fixed-rate loan is the traditional real estate loan many people received 30 and 40 years ago. The loan had a fixed rate, meaning same interest rate for the life of the loan. The terms were typically either 15 or 30 years long. The rates tend to be higher than adjustable rates by a percentage point or more. Nevertheless, the protection from interest rate increases and the stability of a constant monthly payment is appealing to many fixed-income individuals. One of the largest downsides to a fixed rate mortgage is that more of the payment goes towards interest in the first several years than principal, which does not make sense for someone who will sell their home within the first few years.

If you want the best of both worlds, a hybrid loan is for you. With a fixed rate for the first three, five, seven, or 10 years and lower rates than fixed-rate mortgages, hybrid loans were the favorite among first-time home buyers until a few years ago. Interest rates start between ARMs and fixed-rate loans, and give the best benefit to home buyers who will move within the first few years. With an adjustable period after the fixed period and longer 30-year terms, the hybrid gives the best of both worlds.

One exotic loan, which has become the most popular among first-time home buyers, is the interest only loan or “I/O.” Originally designed for investors who wanted a strong cash flow, the interest-only loan has become a staple for most large lenders. Interest-only loans usually adjust or are fixed for set periods and due within 10 years. To calculate an interest-only payment simply multiply the rate as a percentage by the loan amount and divide by 12\. The reason I/Os have become popular is because they have lower monthly payments since no principal amount is being paid. For a first-time home buyer this is appealing. The downside to an I/O loan is if the property’s value decreases, the owner has to wait for it to increase or pay out the difference to get a new loan.

Lenders today are always thinking of ways to generate new business from residential loans. One of the new products created was a 40-year amortization loan term. Rumors have even started about a 50-year amortization term. By extending the amortization term, the monthly payments decrease, but the overall interest paid increases substantially. With the stratospheric prices homes are hitting today, it is no surprise lenders are thinking of new ways to lower monthly payments. However, no matter how exotic loans become they will tend to fall into three categories — adjustable rate mortgage, fixed and hybrid — with interest only taking an honorable mention. (Mike Heayn is a Washington Mutual multi-family loan consultant. He (310) 428-1342, or e-mailed at Visit his Web site at www.re101.net.)

*Originally published in the Santa Monica Daily Press print edition on August 9, 2006.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/080906.pdf?ref=smdp.com)