Final answer:
A considerably larger final payment on an under-amortized mortgage loan is called a balloon payment. When interest rates rise, the value of existing lower-rate loans decreases. Paying off debt faster can save on interest and reduce the total amount paid over the life of the loan.
Step-by-step explanation:
A final payment of a mortgage loan that is considerably larger than the other monthly payments because the loan was not fully amortized is known as a balloon payment. This type of payment structure is typically used when the borrower and lender expect that the borrower will have access to a larger sum of money before the end of the loan term, allowing them to clear the outstanding balance. The monthly payments cover interest and a small portion of the principal, but not enough to fully pay off the day by the end of the term, resulting in the remaining balance becoming due as a single large payment at the end.
When interest rates rise, the value of a fixed-rate loan made when rates were lower decreases because the loan's interest rate is no longer competitive with the current market rates. Meanwhile, if a borrower has a history of late payments, their reliability is in question, making the loan less valuable to potential buyers or investors.
It is important to understand these elements when considering a mortgage loan, especially in decisions regarding paying off debt faster to avoid large interest expenses, as paying more than the minimum can result in significant savings over the long term.