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Mortgage Refinance 101

Types Of Mortgages

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These days, there are a variety of mortgages, different variables that can be mixed and matched. Variations include how interest is calculated, length of time the mortgage exists, and payments.

Interest Rates

There are both fixed and variable (adjustable) interest rate mortgages.

  • Fixed rate mortgages set the interest rate for the entire mortgage term. Fix rate mortgages generally have higher rates initially but the rate is locked in over the life of the loan. You are not at risk from rising interest rates. If interest rates drop substantially, it is possible to refinance (with additional fees.)
  • Adjustable-rate mortgages, just as the names implies, adjust interest rates periodically to match current interest rates. Generally the adjustment happens once a year, and has a maximum amount of increase permitted each time. There is also generally a cap on the total rate payable. The borrower is at risk of higher interest rates. On the other hand, you receive a lower interest rate if interest rates drop.

A variation of this type of interest is a one-year adjustable-rate mortgage. The interest rate is fixed for one year. Then it adjusts annually.


With most mortgages, part of each payment pays interest and part reduces the amount of principal (the amount of your debt.)

Some mortgages are "interest-only" for a period of time.

  • You only pay interest rather than interest and principal for first part of the loan, typically for the first ten to fifteen years. Then in the second part of the loan both interest and principal begin to be repaid. With this type of loan, you basically pay off the balance of the mortgage over the last part of the loan term instead of over the whole term. You are not building equity in your home during the interest-only period, except for the amount of the rise in property values, if any.
  • When your finances improve you can minimize the shock of the higher payments later by paying money against the principal during the interest-only period. As you pay down the principal, the interest-only payment is reduced to reflect the lower loan balance.
  • These mortgages can come with a fixed interest rate or a variable (adjustable) interest rate. (See above.)

There are also mortgages in which the amount you pay does not pay off the entire amount of the loan over the loan term. In those cases, you owe a "balloon" payment at the end - a payment of a large amount of money. There is a risk if you cannot come up with that amount of money on a timely basis.


15-year and 30-year mortgages are the two most common lengths for mortgages. The longer the mortgage, the more interest you pay. When you compare the actual numbers, you will see that the difference can be very substantial. Choice of mortgage length may depend on the very pragmatic question: how much do monthly payments work out to be? A mortgage with a longer life with have lower payments per month.

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