Fixed Rate Mortgages

By Susan M. Keenan

Many homeowners opt for fixed rate mortgages, especially for a first time home purchase.  A fixed rate mortgage has a stable interest rate over a predetermined number of years.  This means that the interest rate never changes during the lifetime of the loan.  Common terms for fixed rate mortgages include 10, 15, and 30 year terms.  Other terms are available, however, they are not as commonly offered.

 

Mortgages with longer terms will have smaller monthly payments.  However, the total amount of interest spent over the lifetime of the mortgage will be greater.  On the other end of the spectrum, mortgages with shorter terms will have larger monthly payments.  On the positive side of things, however, mortgages with shorter terms will save substantially on the amount of interest over the lifetime of the mortgage.

 

The fixed rate mortgage is extremely popular during times when the interest rates offered are low.  The opportunity to lock in at a low rate is an opportunity to save substantially on the overall cost of the mortgage.  This is a very useful type of loan for homeowners who intend to remain in their home for a long time.

 

Several advantages exist with this type of mortgage.  First, the monthly payment is always the same- no surprises.  Secondly, the interest rate never changes, so the homeowner never needs to worry over rising interest amounts.  Third, the amount of each monthly payment that goes toward interest charges decreases each month.  Fourth, the amount of each monthly payment that goes toward interest principal increases each month. 

 

Additionally, fixed rate mortgages with longer terms have a slight advantage over fixed rate mortgages with shorter terms when it comes to the affordability of homes.  A smaller monthly payment can help to make a home with a larger price tag slightly more affordable.  Even so, if the homeowner opts for a home with a smaller price tag, then more money is readily available for other expenses.

 

As with most expenses, this type of mortgage also provides a few disadvantages.  Unfortunately, if interest rates drop to a lower percentage, this fluctuation is not reflected in the fixed rate mortgage.  Additionally, mortgage loans with shorter terms may come with slightly lower interest rates as well.

 

One factor to be considered in determining which term to go with is the simple fact that home equity is built up much more quickly with a shorter term than with a longer term.  Obviously, since the payments with a shorter term are larger, the amount of the payment that goes toward the principal borrowed on the home will be larger.

 

Several factors influence the amount of the monthly payment including the rate of the interest, the sum of the mortgage amount, and the length of the term.  The larger the amount of borrowed money, the larger the monthly payment will be.

 

To sum it up, the fixed rate mortgage offers stability with set monthly payments, security with a set monthly interest rate, and flexibility with a range of term options.  Additionally, prepayments can often be made on fixed rate mortgages without prepayment penalties being imposed.  However, it is important to check with your mortgage lender prior to prepaying on your mortgage.

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