Home Buyer’s Ultimate Guide to Fixed Rate Mortgage Loans

What is a fixed rate mortgage?

Ultimate Mortgage GuideFixed rate mortgages are the most common type of mortgages available. A fixed rate mortgage is a mortgage where the interest rate on a loan does not change over the duration of the loan.

Another common trait of a FRM is that the payment first covers the interest charge for the previous month, and then what’s left is used to reduce the principal balance. As the principal balance gets smaller each month, less of the payment is needed to cover the previous month’s interest and more will go toward the principal balance.

If you plan on staying in a home for quite a while then a fixed rate mortgage may be the right loan for you since you will have the security of knowing what your payment will be each month because the interest rate doesn"t change.

It"s also a good idea to get a fixed rate mortgage if you know the interest rate is set to rise so you can get locked in at a lower rate. This type of mortgage is typically either on a 15 year or 30 year amortization (gradual reduction of a debt by regular scheduled payments of interest and principal.) payment plan.

Pros and Cons of a Fixed Rate Mortgage

Pros: As the name implies the interest rate is fixed which allows the monthly payments to be more predictable because the interest rate does not change over the life of the loan. This puts a lot of home buyers at ease because they don"t have to worry about their payments increasing due to fluctuating interest rates associated with an variable rate mortgage.

Shopping around for a loan is easier because your basically comparing rates and grabbing what"s best for your situation. The math involved with calculating your loan is also easier than an ARM. With ARMs, you have to put in a lot more work to figure out the math, and the terms and conditions are considered a bit more complicated as well.

Cons: Probably the biggest negative hands down about a FRM is buyers remorse that can come from bad timing when locking in your interest rate. A quick example of this would be you lock in your rate at the beginning of the year at 4.2% then over the next 6 months the rates continues to drop to 3.5%. Ouch, if only you could have predicted that. Trying to predict the market can prove to be quite difficult.

Fixed rate mortgages usually don"t come with the low intro rates that adjustable rate mortgages offer and may be a downfall if you don"t plan on seeing out the life of the loan such as refinancing or selling your home.

Types of Fixed Rate Mortgages

10, 15, 30, 40 year fixed rate mortgages: The 15 year and 30 year mortgages are the most popular loans that home buyers elect to go with. The longest mortgage you can have is the 40 year loan. Keep in mind that the longer the loan the lower your monthly payments will be, however the longer loan will result in you paying more money in the long run. Shorter loans like the 7, 10, and 15 year loans are typically for commercial properties.

Biweekly: A biweekly mortgage is really just a time schedule for making payments on your loan. Typically with this type of loan you pay half the mortgage twice a month rather than the whole amount once a month. Paying this way makes paying off your loan a little more managable.

Convertible Mortgage: This type of loan will allow homeowners to convert their mortgage to a lower interest loan if the interest rates go down after the initial mortgage is in effect. These low interest loans come with setup fees so a person considering such a loan should make sure the interest rate is low enough to warrant the extra upfront costs.

Balloon Mortgage: This will allow home buyers to make small monthly payments for a period of 5 to 7 years. When the specified time period expires the remaining balance is due in one lump sum. A clause is usually written into the loan that will allow the homeowner to convert the loan to a conventional fixed rate mortgage if they are unable to make the full balloon lump sum payment.

Interest Only Mortgage: With this type of loan the homeowner will only pay the interest on the loan making the payments very low, Home equity loans work in a similar fashion. With an interest only loan you should expect lenders to place time limits on how long you can only pay the interest. This type of loan is typically used to help homeowners who may be struggling financially keep up with their payment and not lose their home.

15 year fixed rate mortgage vs 30 year fixed rate mortgage

15 Year Fixed Mortgage:

Pros:

Lower interest rate
Lower interest paid during term of loan
Build equity faster
Pay off your loan in half the time
Good for those who are close to retirement or conservative investors

Cons:

Harder to qualify due to higher payments
You may not be able to buy as much house
Your house payments may tie up all your money
Could find a better return on your investment elsewhere.

30 Year Fixed Mortgage:

Pros:

Lower more affordable monthly payment
Easier to qualify
Ability to buy more house with smaller payments
Can always make prepayments if you want
Good for those looking to invest money elsewhere

Cons:

Higher interest rate
Builds equity at a slower rate
Could lose easily if prices fall
Harder to refinance with little equity
It takes 30 years to pay off your loan
Fixed Rate Mortgage vs Adustable Rate Mortgage (ARM)

Fixed Rate Mortgage

Pros:

Rates and payments are set for life of loan
Stability makes budgeting easier
Simple to understand

Cons:

May lock in your loan at a higher right. To get a lower rate you"ll have to refinance which means a few thousand dollars on closing costs, another trip to the title company"s office and several hours spent digging up tax forms, bank statements, etc. In some cases a fixed rate mortgage could be too expensive for some borrowers.

Adjustable Rate Mortgage

Pros:

Lower rates and payments early on in the loan
Take advantage of falling interest rates without refinancing
Helps borrowers save and invest more money
Cheap way for borrowers who don"t plan on living in one place for very long to buy a house

Cons:

Not only can ARMs be difficult to understand but the rates and payments can rise sharply over the life of the loan. In addition certain ARMs, called negative amortization loans, borrowers can end up owing more money than they did at closing because the payment for these loans are set so low that they only cover part of the interest.