Most homeowners opt for a self-liquidating mortgage.
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When a borrower has a self-liquidating mortgage, she pays off the loan gradually over time, usually in 15 or 30 years, in a process called amortization. When the borrower makes her final mortgage payment, she has paid off the entire loan and owes nothing more. The self-liquidating mortgage, also called an amortized mortgage, is the option most home buyers use.
Self-Liquidating Mortgage vs. Balloon Mortgage
Mortgages come in two main structures, self-liquidating mortgages and balloon mortgages. With a balloon mortgage, the borrower makes consistent monthly payments for a set period of time, usually five to seven years. However, unlike a self-liquidating mortgage, the payments do not fulfill the loan. After the borrower has reached his initial five- to seven-year fixed-payment term, he owes the balance of the loan in full. The balloon payment is often nearly as much as the original loan amount, but a self-liquidating mortgage avoids this by spreading out the entire balance
The Amortization Process
With a self-liquidating mortgage, borrowers slowly pay off the loan, with one portion of each monthly payment going toward the principal, or how much the buyer initially borrowed, and another portion going toward interest. Early payments contribute primarily toward paying down the interest, with only a small portion going toward the principal. Over time, more of each payment goes toward repaying the principal, so that by the time a borrower reaches the end of his mortgage term, he has completely paid down both interest and principal.
Types of Self-Liquidating Mortgages
A self-liquidating mortgage is either an adjustable- or fixed-rate mortgage. The interest rates and monthly payments for adjustable-rate mortgages fluctuate over time. Initial interest rates for adjustable mortgages are fixed and are usually lower than the starting rates for fixed rate mortgages. After the fixed-rate period ends, interest rates vary. With a fixed-rate mortgage, the interest rate stays the same for the life of the loan, and monthly payments remain consistent.
Who Benefits From a Self-Liquidating Mortgage?