In this lesson, we focus on the most common type of mortgage - the
A traditional fixed-rate mortgage has the following attributes:
- The interest rate remains the same (i.e., fixed) during the life of the
- The borrower makes 12 payments each year - one per month.
- Monthly payments are constant during the life of the loan.
- A portion of each monthly payment covers interest expense, and a
portion covers principal.
common fixed-rate mortgages are 15-year and 30-year mortgages, but you may be
able to negotiate a loan for any duration.
A shorter-term loan has advantages over a longer-term loan:
the loan is paid off quicker, the interest cost is
reduced, and interest rates are often lower. The main disadvantage
of a shorter-term loan is a higher monthly loan payment.
Variations on the Fixed-Rate Mortgage
The traditional fixed-rate mortgage is not the only type of fixed-rate
mortgage. Here are some other versions of the fixed-rate mortgage
that you might want to consider.
- Biweekly fixed-rate loans.
A biweekly mortgage requires payments every two weeks instead of
once a month. You can structure your biweekly mortgage so that
each biweekly payment equals half the monthly payment for a
traditional fixed-rate loan. When you do this, you make
the equivalent of 13 monthly payments each year; but you lower your
interest expense and pay the loan off quicker.
The "extra" payment makes it possible to pay off a 30-year mortgage
in 18 to 20 years,
||If you have a traditional fixed-rate mortgage, you can obtain
substantially all of the benefits of the above "biweekly" strategy,
simply by making an "extra" mortgage payment (called a
prepayment) each year.
Use the free
to discover how much quicker you can pay
off your mortgage and how much you can save by making an extra
mortgage payment. The
prepayment case study
- Balloon loans.
A balloon loan is a type of short-term loan. Initially, it works like
a traditional fixed-rate mortgage, requiring regular monthly payments of
principal and interest. Then, after a period of time (usually
between 3 to 10 years), it becomes 100% due. At that time, the borrower
must pay the loan off in cash (referred to as the
balloon payment) or refinance.
Usually, the interest rate on a balloon loan is lower than the interest
rate on a traditional, fixed-rate mortgage.
- Interest-only mortgages.
An interest-only mortgage allows the borrower to pay only interest
on the loan for a set period of time. At the end of that time, the
borrower may renew the interest-only mortgage (usually at the option
of the lender), repay the principle,
or (under some arrangements) change the loan to a traditional