Interest rates rise and fall over time. A fixed-rate mortgage protects you from such fluctuations by locking you into a permanent interest rate when you take on the mortgage. The following table shows the main advantages and disadvantages of fixed-rate mortgages.

  • Stability: The interest rate and monthly loan payments of fixed-rate mortgages never change: if you pay $1,500 per month today, you’ll pay $1,500 decades from now.
  • Higher initial costs: Interest rates on fixed-rate mortgages are usually higher than the initial rates on ARMs and other types of mortgages.
  • Simplicity: If the many complexities and contingencies of other types of loans (such as ARMs) make you uneasy, a fixed-rate mortgage might be your best choice.
  • Assumability: Fixed-rate mortgages are usually not assumable (transferable), which makes them more limiting than assumable mortgages, such as ARMs.

Fixed-rate mortgages can cover terms of 15, 20, 30, or 40 years. The most common are the 15- and 30-year varieties.

Balloon Loans

Balloon loans amortize like regular 30-year fixed mortgages, but at the end of a set period of time (usually 5, 7, or 10 years), the total principal balance becomes due all at once. Balloon mortgages typically offer lower rates than their nonballoon equivalents, but the borrower must have the money on hand to pay off the loan in full when it comes due. Balloon loans are best for borrowers who:

  • Know for sure that they’ll sell their home within 5, 7, or 10 years (before the balloon payment comes due)
  • Are extremely confident that they’ll have the cash required to pay the loan off in full or have a significant boost in their income that will allow them to do so

Negative Amortization Loans

Negative amortization loans have monthly payments that intentionally don’t cover the amount of interest that the borrower should be paying each month. The amount of interest that you don’t pay each month then gets added to the principal. Over time, you can end up owing considerably more on a loan than the property securing the loan is actually worth. Though lenders may try to entice you to buy a home you can’t really afford with a negative amortization loan, you should never take on this type of loan.

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