Fixed Rate Mortgage
The most common type of mortgage program where your monthly payments for interest and principal never change. Property taxes and homeowners insurance may increase, but generally your monthly payments will be very stable.
Fixed rate mortgages are available for 30 years, 20 years, 15 years and even 10 years. There are also “biweekly” mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 “months” worth, every year.)
Fixed rate fully amortizing loans have two distinct features. First, the interest rate remains fixed for the life of the loan. Secondly, the payments remain level for the life of the loan and are structured to repay the loan at the end of the loan term. The most common fixed rate loans are 15 year and 30 year mortgages.
During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. A typical 30 year fixed rate mortgage takes 22.5 years of level payments to pay half of the original loan amount.
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What You Need To Know About Conventional Mortgage Loans
A mortgage is a lot like a marriage. Both are designed to bring value into your life. Both are a binding contract with responsibilities that should be taken seriously. Both are designed to last for years. Both should be considered carefully and celebrated when you find the right one. And much like a marriage, finding the best mortgage deal can very easily be either a really good or a very bad experience. Being able to understand how mortgages work and the different types available is important information that you should know when you look at buying a home or property. HomeMortgage.com is your resource to financial guidance when it comes to buying or refinancing your home. There are a few different types of mortgage options to consider when looking at buying a house, and a fixed rate mortgage is a great choice.
What is a fixed rate mortgage?
A fixed rate mortgage is one of the most common types of mortgage loans. Unlike a variable or adjustable rate loans, a mortgage with a fixed rate has a set interest rate for the life of the loan. With this type of loan, you’ll generally have a stable monthly payment that doesn’t change very often. Things like your property taxes or homeowners insurance may change, but your interest rate will remain the same.
Like many other mortgages, you have options for a 10, 15, 20 and 30 year repayment. They are typically amortized, which means that your payment will go towards both your principal and your interest. Interest is easily calculated, as it goes off of the initial amount of the loan. Your payment will generally go to paying the interest part of the payment first, and then the rest to the principal amount. So while the first five or ten years a good majority of your payment goes towards the accrued interest, you do gain equity with each payment you make.
There are also unamortized fixed rate mortgage loans, also known as a balloon payment loan. This type of loan has a repayment system that is made up of set interest payments paid monthly, with nothing paid towards the principal you go to pay off the full amount of the original loan. This does make monthly payments significantly cheaper, however you don’t gain equity with any installment you make. There is a lot of risk with this particular type of loan, as most people can’t make a lump sum payment of the full amount of what was borrowed to begin with. If you can’t pay the principal amount, or “balloon payment”, you can lose your house. If your house sells for less than you borrowed, you’ll still owe whatever the difference may be.
Pros and Cons of a Fixed Rate Mortgage
There are many advantages to having a mortgage loan with a fixed rate.
- Primarily, the borrower is protected from a flexible and unpredictable market. Even if interest rates swing drastically from low to high, you are protected from a possible crisis.
- They are very easy to understand, helping you not get lost in paperwork and finance jargon when you sign your contract. This also makes them much easier to shop for.
- Most of us don’t have flexible income that could keep up with interest rates that could change in an instant. This way, you can count on paying the same amount each month.
The cons of a fixed rate mortgage, while there are few, should always be considered when it comes time to borrow money for your house.
- Unfortunately, when interest rates are high the monthly payment isn’t as affordable. This makes it harder for people to qualify for a loan, or even want to get one in the first place.
- If interest rates drop, you’re stuck with a high rate and a high payment.
- They might be more expensive the first five to ten years than a loan with an adjustable interest rate.
- Depending on the terms of your loan, the current interest market, and your credit score, the interest rates are usually higher than a mortgage loan with an adjustable rate.
- You can lose the advantages of a loan with a fixed rate if you decide to refinance within the first couple years. The traditional terms of your mortgage might require you to keep things as-is for a certain amount of time to keep your fixed rate.
- If you plan on selling your home after a few years, you might owe a lower amount of interest with an adjustable rate mortgage.
There are a lot of things to think about when you’re shopping for a home loan, and a lot of it comes down to what kind of person you are. Are you comfortable with the risks of the ever changing interest rate marketplace? Can you afford your monthly payment even when interest rate are high? How long do you intend to live in the house you’re buying? It’s all food for thought.
The best thing to do when trying to decide between a fixed rate mortgage and one with variable interest is to lay out your finances in a way that will work for the long term. Even if your mortgage has only a ten year repayment period, most people don’t have major changes in their income or spending habits. Look at what you can afford versus what you’re comfortable with spending. Think about your “ten year plans” and see if it includes living in a different home. Think about what you can afford to pay each month and still lead a pleasant lifestyle. Always set yourself up for success the best you can.
How To Get a Mortgage With a Fixed Rate
If you’ve decided that a fixed rate mortgage would work best for you, the next step is to find the right lending company. HomeMortgage.com is here to help you find the best loan officer that will be the perfect match for you and your needs. First, we take the time to get to know you. We can help you get pre-approved so you know the price range you can be comfortable looking in. That way when you find your dream home, you can make a confident offer to make it your own. We work with loan officers in many cities through the great state of Arizona, including:
- Queen Creek
- Sun City West
- Litchfield Park
- Paradise Valley
- Casa Blanca
- Chandler Heights
- Sun Lakes
- Cave Creek