Fixed-Rate Mortgage

• A fixed-rate mortgage is a loan for property purchase that has a defined length to the loan. Typically, fixed-rate mortgages are set for 15 or 30 years, however, they can be set for any amount of agreed-upon terms. A fixed-rate mortgage has the same payment each month. The process to determine payment is to add the sales price minus the down payment to compounded interest, then divide the total by the number of months for the total loan life. The amount becomes the monthly payment that remains constant for the entire loan. There may be a final payment that is less than the usual monthly payment as the balance may work out that way for the final month. The payment does not change with market interest rate fluctuations because the interest is locked in at the time of the sale.
  
  

Interest-Only 1

• The first type of an interest-only loan is one in which the property owner is only required to pay the interest each month. The purpose of such loans is typically to reduce the monthly payment. Because there is no money being applied to the principal, there will be a balloon payment due at the end of the loan. This loan is usually taken by property owners who believe they will build careers or anticipate financial windfalls, such as an inheritance, or believe they will be able to sell the home for more than is owed before the final payment comes due. Such loans are generally restricted to those who have stellar credit and solid job histories.
  
  

Interest-Only 2

• The second type of interest-only mortgage also is referred to as an adjustable-rate mortgage (ARM). With ARMs, interest is fixed for the first year, and then adjusts each year with the federally determined interest rate. An ARM can also be an interest-only loan, though the monthly payment is constantly changing due to changes in the federally determined rate.
  
  

Principal Prepayment

• Property owners with interest-only mortgage agreements are only required to pay interest until the balloon payment comes due, however, they have the right to prepay on the principal at any time. For example, if the property owner pays half of a monthly principal payment in addition to the interest for the life of the loan, the required balloon payment will be for half of the property sales price.