Standard disclaimer: I don’t do this for a living, just another guy buying a house. And I just went through all the paperwork for this last night, so things are a little fresh in my memory.
It depends on your current financial situation, how long you’re planning on keeping the house, and how much risk you want to assume.
Fixed Rate: The interest rate you get once the loan is “locked” is set for the entire duration of the loan. The rate will be higher some of the other options, but you won’t have to watch the market to see whether it’s going to change, either. Rates are very low right now, so any “adjustable rate” loan is likely to go up over the long term.
ARM and interest only are variable rate loan types. With interest only, the bill you get only covers the interest accrued over the last month (or whatever the payment period is). So you have a lower required payment, but you’re not reducing the pricipal any unless you overpay. Some people take these and pay only the minimum in the hope that the house value will appreciate over the period they’re going to own the house and make a net profit on the sale a few years down the line.
I’m not sure how ARM differs, that may include interest + principal on the bill.
There are a few different types of interest-only. When I spoke to my loan officer there were some options to “lock” the interest rate for a certain period of time, although the longer the lock the higher the rate. The ones he laid out for me varied between a 1 year lock to a 10 year lock (which was barely below the 30 year fixed rate). If you’re expecting to sell the house within that period, that may shave a bit off the interest and be a better choice.
There are also HELOC loans (Home Equity Line of Credit). Think of this as like a credit card with a credit limit equal to the initial loan amount. After you pay some of the principal off, you have so much available to draw from (although you still have to get to a zero balance by the end of the loan period) for things like home improvements, emergencies, new toys, etc. Unless you’re the kind of person who’s very careful with your money, you may want to avoid this, otherwise you could find yourself with a very large bill years down the line. I believe these are almost exclusively for second loans (see below).
The “piggy back” loan is a very good option, but may require a pretty good credit history to qualify for. Basically, if you get only a single standard 30 year loan, you have to pay mortgage insurance until you have paid off a certain percentage of the house (usually 20%). If you have the 20% to put down, you don’t need to worry about the second loan. Then again, that much cash usually isn’t available to anyone buying their first home. The second loan can be any type (ARM, HELOC, interest only, fixed rate) completely separate from whatever you got for the primary one.
I’m going that way. For me, the way that works for is like this:
I got a 30 year loan for the price of the house minus the cash I’m putting up (5%).
I got a second loan for 15% of the house price, used to pay off part of the first loan. The second loan is at a higher interest rate, and has a 360/180 setup. The monthly payment amount is calculated on a 360 month amortization, but it must be paid off in full after 180 months. The schedule had 179 payments of about $230 with payment #180 being 22,000. Obviously, you can (and should) ease that final bill by making overpayments.
The second loan payment is a little more than what mortgage insurance would cost, but part of that money does go into the equity of the house, and I’m pretty sure (but not 100%, I have to do some more research on it) that the interest on the second loan counts for tax deductions the same as the interest on the primary loan.
Both of my loans are fixed rate. I’m looking at a total bill of around $1250 per month (barring any rate adjustment between the initial paperwork and getting “locked in” to a rate), although I’m probably going to be actually paying around $1500-1600 (with most of the overpayment being into the second) since I don’t like debt. Between having a larger space, the ability to do what I want to it, the tax savings, and having my girlfriend move in with me and covering some costs, I consider it a net gain for me over renting.