If you were to rate every possible loan program on a scale from the most conservative to the least conservative, youd have the 30-year and 40-year fixed amortizing loans on the conservative end and the negative amortization variable-rate loans on the opposite side. Those are the two extremes.
On the conservative end, youre paying off the loan at a fixed interest rate. Nothing changes. Your payment is exactly the same each and every month, for 30 or 40 years. That means you make the exact same payment today as you will in the year 2036, or even 2046.
On the aggressive end, youve got a loan where your payment isnt even enough to pay the interest on the loan! So the size of the loan is actually getting bigger each month. To make matters worse, the underlying interest rate is variable. That means you cant even plan the extent to which your loan balance is expected to grow.
Well take a look at the whole spectrum but first, we need to examine the interest rate structure. The 30-year fixed mortgage is one of the most conservative options available. It has the least amount of risk. Well, for the bank, the opposite is true. By reducing risk for the borrower, all the...
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