Fixed Rate Mortgages

The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners' insurance may increase, but generally your monthly payments will be very stable.

Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

Fixed rate fully amortizing loans have two distinct features. Firstly, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15-year and 30-year mortgages.

During the early amortization period, a large percentage of the monthly payment is used for paying the interest . As the loan is paid down, more of the monthly payment is applied to the principal. A typical 30-year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.

Balloon Mortgages

Balloon mortgages are short-term loans that have some features of a fixed rate mortgage. The loans provide a level payment feature during the term of the loan, but as opposed to the 30-year fixed rate mortgage, balloon loans do not fully amortize over the original term. Balloon loans can have many types of maturities, but most balloons that are first mortgages have a term of 5 to 7 years.

At the end of the loan term, there is still a remaining principal loan balance and the mortgage company generally requires that the loan be paid in full, which can be accomplished by refinancing. Many companies have other options such as a conversion feature at the end of the term. For example, the loan may convert to a 30-year fixed loan at the thirty-year market rate plus 3/8 of a percentage point. Your conversion can be guaranteed based on certain criteria, such as having made your last 24 payments on time. The balloon mortgage program with the conversion option is often called a 7/23 Convertible or 5/25 Convertible.

Nathan Toler is Vice-President of Internet Operations for Sharp Mortgage Group, a zero-down home mortgage specialist. Click here for more about VA home loans and mortgage rates for Virginia.