A brief description of fixed rate mortgages and the externded finacial markets that create them.
A fixed rate mortgage is the most common type of home loan, where interest rates and principal payments don't change throughout the length of the loan.
A fixed rate mortgage is best for those who don't want the uncertainty of fluctuating interest rates - and therefore fluctuating payments - in an unsure market. With a fixed rate mortgage, from the time you sign the papers until the day the mortgage is paid in full, the monthly payments and the interest rate will remain the same. Property taxes and insurance are the only variables in the payment, but those generally don't increase very much.
There are two primary terms in fixed rate mortgages: 30-year and 15-year terms. Both have advantages and disadvantages; it is strictly up to the consumer to decide what fits his or her needs. Depending on the financial institution, a 20-year fixed rate mortgage is sometimes available as well.
A 30-year fixed rate mortgage offers lower payments than a 15-year fixed rate mortgage; however, the interest rate will be higher. A 30-year fixed rate mortgage is also a smart move when interest rates are low, as they will remain at that low for the duration of the mortgage. If rates go lower, the homeowner can refinance.
During a 30-year fixed rate term, the first 15 years allow the bank to collect their interest payments first. By the end of the loan the borrower will have paid double or triple what their home is worth.
A 15-year fixed rate mortgage offers a lower interest rate than a 30-year. It also allows homeowners to build up equity faster, because the principal balance of the loan is being paid down more quickly. Of course, the monthly payment will be higher than a 30-year, because more money will be applied to the principal balance early on.
Money sent in as a mortgage payment is split between the following: principal payments, interest payments, property taxes, and insurance. In many cases, depending on the type of loan, PMI (private mortgage insurance) is also worked into a mortgage payment. This is often the case for a first-time mortgage holder. In the case of a long-term loan, this division leaves little money for the principal.
To determine if a fixed rate mortgage is for you, ask yourself these questions:
1. Do I plan on living in this house for at least 10 years?
If the answer is yes, a fixed-rate mortgage would make sense. You have the benefit of locking in your interest rate for a long period of time, and your low payments will allow you extra money for home improvements or new investments.
2. Am I on a limited monthly budget?
Again, if the answer is yes, a 30-year fixed rate mortgage is the way to go. No matter the interest rates, this loan will always offer you the lowest payment. If you want to pay extra money towards your principal, however, you always have that option.
3. Am I looking for the best tax break now?
A loan spread out over 30 years means quite a bit of interest, so it is divided equally throughout the term of the loan. Initially, the bulk of your payments will be interest payments, with only a minimal amount being applied toward the principal. However, all those interest payments are a tax deduction, which could mean larger returns or lesser tax payments at the end of the year.
A mortgage, no matter what the term, is a huge commitment. Doing the correct research and being honest with household budgets is the only way to determine if a fixed rate mortgage is the right choice.
