Types of Mortgage Amortization
There are four main categories of mortgage amortization, organized by the payment schedule and interest calculation method.
Main Categories
- Fixed-Rate Amortization — a type of amortization where the interest rate remains constant over the life of the loan, resulting in equal monthly payments, as seen in the 30-year fixed-rate mortgage offered by Wells Fargo.
- Adjustable-Rate Amortization — a type of amortization where the interest rate can change periodically based on market conditions, leading to variable monthly payments, as seen in the 5/1 adjustable-rate mortgage offered by Bank of America.
- Interest-Only Amortization — a type of amortization where the borrower only pays interest on the loan for a specified period, typically 5-10 years, before switching to a fully amortizing payment schedule, as seen in the interest-only mortgage offered by Chase.
- Balloon Amortization — a type of amortization where the borrower makes smaller payments for a specified period, typically 5-7 years, before making a large balloon payment to pay off the remaining balance, as seen in the balloon mortgage offered by US Bank.
Comparison Table
| Category | Payment Schedule | Interest Calculation | Risk |
|---|---|---|---|
| Fixed-Rate Amortization | Equal monthly payments | Fixed interest rate | Low |
| Adjustable-Rate Amortization | Variable monthly payments | Adjustable interest rate | High |
| Interest-Only Amortization | Interest-only payments for a specified period | Fixed or adjustable interest rate | Medium |
| Balloon Amortization | Smaller payments for a specified period, followed by a large balloon payment | Fixed or adjustable interest rate | High |
How They Relate
The categories of mortgage amortization often overlap or are commonly confused, particularly between Fixed-Rate Amortization and Adjustable-Rate Amortization, as some loans may offer a fixed rate for an initial period before switching to an adjustable rate. Additionally, Interest-Only Amortization and Balloon Amortization can be combined, where the borrower makes interest-only payments for a specified period before making a large balloon payment. Adjustable-Rate Amortization and Balloon Amortization can also be paired, where the borrower makes smaller payments for a specified period, with an adjustable interest rate, before making a large balloon payment. For example, a borrower may choose a 5/1 Adjustable-Rate Amortization with a Balloon Payment after 7 years, which would require careful consideration of the potential risks and benefits. Understanding the differences and relationships between these categories is crucial for borrowers to make informed decisions about their mortgage options, such as the Federal Housing Administration's (FHA) mortgage insurance programs, which can affect the amortization schedule.