Fixed-Rate Mortgage

• A fixed-rate mortgage has the same interest rate and monthly payment for the mortgage term, which is usually 15 or 30 years. The payments are structured to pay off the mortgage at the end of the term. The homeowner builds equity at a steady and predictable rate every month. However, he could end up paying more if interest rates fall and stay low for an extended period of time.
  
  

Adjustable-Rate Mortgage

• The most common form of adjustable-rate mortgages (ARMs) are hybrids. They are often advertised as 3/1 or 5/1 ARMs, meaning the interest rate is fixed for three or five years, respectively, and then it adjusts annually. ARMs are usually for 30-year terms. The interest rate consists of the index, which is a general measure of interest rates, and the margin, which is an extra amount added by the lender. ARM payments can be lower when rates fall and higher when rates increase. Some ARMs have caps that limit payment increases in a period of rising rates.
  
  

Reverse Mortgages

• Reverse mortgages may be available to homeowners 62 years or older who own all or almost all the equity in their home. The homeowner exchanges this equity for a monthly loan (or lump sum payment or line of credit), which, along with accrued interest and other fees, is payable when the borrower dies, sells the home or moves out for 12 months or more. Unlike a traditional mortgage, the equity decreases and the amount owed increases as interest and other charges are added to the original loan amount. Borrowers or their heirs usually repay a reverse mortgage by selling the home. The risk is that by using up the home equity, there may be less money later for health care and other emergencies.
  
  

Negative Amortization

• Negative amortization occurs when the monthly mortgage payments are not sufficient to pay the interest due on the mortgage. The unpaid interest is then added to the mortgage principal, thus making the amount owed more than the original mortgage. Negative amortization could also result from falling home prices. During recessions, such as the one from 2007 to 2009, economic conditions and foreclosures may lead to sharp drops in home prices, in some cases below the mortgage balance.