LESSON 3: TYPES OF LOANS -- FIXED-RATE MORTGAGES
Now that you understand how mortgages work, what
varieties will you find out there? Lenders offer several types,
but the most common are fixed-rate
mortgages. These loans feature fixed rates and monthly payments,
generally for 15-year and 30-year periods.
They're popular for two main reasons:
1) Consumers balk at the thought of their house
payment rising and falling with interest rates.
2) Low rates in the late 1990s and early 2000s have made long-term
fixed-rate mortgages very affordable.
Fixed-rate loan borrowers face one major
choice: long-term or short-term? For some, a 30-year loan makes
more sense. For others, a 15-year one does. Here are some pros and
cons of each to think about. See
||1. Offers borrowers the chance to borrow money on a long-term basis
without having to worry about the interest rates or payments
2. Monthly payments are lower than
those on shorter-term loans because the interest is amortized
over a longer period of time.
3. Lower monthly payments free up money
that borrowers can pour into investments that yield more than
4. Higher interest bill increases the
amount customers can deduct at tax time, potentially reducing
or eliminating their federal income tax liability.
Borrowers build equity at a very slow pace because payments
during the first several years go largely toward interest rather
2. The overall interest bill is much
higher because of the long amortization term.
(continued on next page)