Financial help for single moms

Chapter 2: Fixed Rate Mortgages

Fixed-Rate Mortgages

Interest rates fluctuate over time.  A fixed-rate mortgage protects from such rises and falls by locking a borrower into a permanent interest rate when the mortgage is taken on.  The following table  shows the primary advantages and disadvantages of fixed-rate mortgages.

Advantages Disadvantages
  • Simplicity:  If the complexities and contingencies of other loan types (like ARMs) make you nervous, a fixed-rate mortgage may be the best choice.
  • Assumability:  Fixed-rate mortgages are typically not assumable (transferable).  This makes them more limiting than assumable mortgages, like ARMs.
  • Stability: The interest rate and monthly payments of fixed-rate mortgages never change over time: if you pay $1,500 per month now, you will still pay $1,500 per month decades from now.
  • Higher initial costs: interest rates on fixed-rate mortgages are typically higher that the initial interest rates on ARMs and other types of mortgages.

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

Balloon Loans

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

  • Are very confident that the they will have the money required to pay off the loan in full or will have a significant  enough boost in their income to be able to do so.
  • Know that they will for sure sell their home within 5,7, or 10 years (before the balloon payment will be come due)

Negative Amortization Loans

Negative amortization loans have payments that deliberately do not cover the amount of interest that the borrower “should” be paying per month.

The amount of interest that isn’t being paid each month then gets added to the principal.  Over time, this can cause you to owe significantly more on a loan than the property securing the loan is actually worth.  Even though some lenders may attempt to entice you to purchase a home that you can’t really afford with a negative amortization loan, you should never get involved with this variety of loan.

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