Fixed Rate Mortgage
A fixed-rate mortgage is the most ordinary and uncomplicated home loan available to homeowners today.
As the name suggests, the interest rate on a fixed-rate mortgage does not change during the entire duration of the loan.
For that reason, fixed-rate mortgages do not have associated mortgage indexes, margins, or caps because they are not variable-rate loans.
Another key characteristic of the fixed-rate mortgage is that monthly mortgage payments remain constant throughout the life of the loan, to the very last month when the loan is finally paid off.
The most common fixed-rate mortgage is the 30-year fixed loan, which amortizes over thirty years, with the majority of early payments going towards interest, and the bulk of later payments going towards principal.
The next most popular fixed-rate mortgage is the 15-year fixed loan, which amortizes over fifteen years, bumping up monthly mortgage payments significantly, but reducing the amount of interest paid throughout the duration of the loan considerably.
Many banks and lenders also offer 10, 20, and 50-year fixed loans as well, though they are far less widespread.
Some fixed-rate loans also feature interest-only periods, which allow homeowners to make interest-only payments during the first five to ten years of the loan duration, though the loan will recast to make up for any reduced payments during that period.
Fixed-rate loans are beneficial for a number of reasons, though the fact that your mortgage payment will never change is clearly paramount.
If interest rates rise, homeowners with adjustable-rate mortgages will suffer the consequences of higher monthly mortgage payments, while fixed-rate borrowers can rest assured that their payments will not change.
Fixed-rate borrowers won’t need to worry too much about where the market is headed either, though it’s wise to monitor interest rates in case a sizable interest rate drop makes it favorable to refinance.
But generally, it’s a pretty stress-free loan choice, and one that’s favored by many government programs for its stability and clear-cut nature.
The only real negative aspect of a fixed-rate mortgage is the perceived higher interest rate, although these days many fixed mortgages price at the same rate as adjustable-rate mortgages.
Typically, homeowners pay a premium to lock in a fixed interest rate, whereas adjustable-rate mortgages are discounted.
Another small negative associated with a fixed-rate mortgage is the idea that many homeowners will fail to refinance when a good opportunity comes around because they are so obsessed with holding onto their low fixed rate.
But all in all, a fixed-rate mortgage is a good choice for a wide array of borrowers because of its low risk factor and lack of surprises.
