Fixed Rate Mortgages
A fixed rate mortgage is the most common type of mortgage program. When you have a fixed rate mortgage your monthly rates will be very stable, changing only if your property taxes and homeowners insurance change.
Fixed-rate mortgages are available for 30, 20, 15 or 10-year periods. Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan. The most common fixed rate loans are 15-year and 30-year mortgages. During the early amortization period, a large percentage of the monthly payment is applied to interest and under a typical 30-year fixed rate mortgage it takes 22.5 years of level payments to pay half of the principal of the original loan amount.
Adjustable Rate Mortgages
Adjustable rate mortgages generally begin with an interest rate that is 2-3 percentage points below a comparable fixed rate mortgage. This could allow you to buy a more expensive home, while keeping your payments within your designated payment frame for a set period of time. However, the interest rate will change at specified intervals (for example, every year) depending on changing market conditions -- if interest rates go up, your monthly mortgage payment will go up, too. But, if rates go down, your mortgage payment will also drop.
There are also mortgage options available that combine aspects of fixed and adjustable rate mortgages –- starting at a low fixed-rate for seven to ten years, for example, and then adjusting to market conditions.
Balloon Mortgages
Balloon loans are short-term mortgages that have some similar features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30-year fixed rate mortgages, do not fully amortize over the original term of the loan. At the end of the loan term there is a remaining principal loan balance and it is generally required that the loan be paid in full, which can be accomplished by refinancing your loan. There are option features offered with many balloon mortgages, such as a conversion feature at the end of the term.
Balloon loans can have many types of maturities, but most balloons that are first mortgages have terms of 5 to 7 years.
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