The fixed rate mortgage is probably the best and most desirable loan for the new homebuyer as well as a seasoned home owner. Most loans are designed as fixed rate mortgage (FRM).
Fixed rate mortgages are generally amortized over a specified number of years in equal monthly payments which include the principal and interest. FRM terms can be Terms can be 15, 30 and even 40 years. In recent years mortgage loans drifted away from fixed rate loans and we are seeing the negative fall-out from other loans like interest only and ARMs’.
The Benefits:
Fixed Mortgage Payment. There will be no surprises even if interest rates increase, inflation occurs or there is a recession. Your interest rate will remain the same. There is greater stability and less risk involved. The fixed rate mortgage allows the borrower to know upfront what all future payments will be.
Easy to Budget. The stability in a fixed rate mortgage allows the borrower to manage their money with more consistency. It will be easier to budget and make financial decisions.
Various Terms. There are several types of fixed rate mortgages:
- 40-year fixed rate mortgage
- 30-year fixed rate mortgage (the most common)
- 20-year fixed rate mortgage
- 15 year fixed rate mortgage
- 10-year fixed rate mortgage
Pay-Off your Mortgage Sooner. With a fixed rate mortgage, the borrower can choose to make larger monthly payments and have that extra money designated directly to the principal balance. By paying just one extra payment a year and having that payment go directly to the principal only, the borrower can reduce their 30-year fixed rate term by 6 to 8 years.
The Disadvantages:
Refinancing. When and if mortgage rates decrease, borrowers would have to refinance their fixed rate loans in order to take advantage of falling rates. Whenever you refinance you will have various fees involved.
High Monthly Payment. Because lenders do not know what the interest rates will be in the future, they may charge you more in the form of higher interest rates, fees and costs of loan origination for having the stability and luxury of a fixed rate mortgage.
Taxes and Insurance. If your loan is higher than 80% of the home purchase price you will more than likely be required to pay monthlyproperty taxes and homeowner’s insurance. Your lender will tack on the costs for the taxes and insurance to your monthly payment and place the extra money into an impound or escrow account. When your taxes and insurance are due the lender will be responsible for paying them.
Pre-Payment Penalty.This clause allows a lender to collect extra money if the borrower pays off the loan early. Typically the pre-payment penalty can range from 1 to 5 years and is calculated as a percentage of the outstanding balance at the time of pre-payment or a specified number of months of unearned on the loan.
