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.
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 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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