Fixed Rate Mortgages

A fixed rate mortgage is one where the interest rate on the note is fixed for the entire term. The most common terms are 15 and 30 years, however, lenders have recently started to offer terms of up to 50 years as a way to keep payments affordable after the record years of appreciation have pushed housing prices up.

The interest rate charged on a fixed rate mortgage tends to be slightly higher than that of an adjustable rate mortgage. The reason for this is because the lender is taking on additional risk with the potential lost opportunity to lend the same money out at a higher interest rate. Fixed rate mortgages are, therefore, recommended for people who think they will stay in the house for at least 5 years. If you will likely be in the house for less than that, it makes more sense to consider an adjustable rate mortgage at a lower interest rate and payment.

The interest rate on a fixed rate mortgage remains constant for the entire term of the loan, and therefore, the monthly payments stay the same. A portion of the monthly payment pays the interest that has accrued since the last payment and the rest goes to reducing the principal balance. In the early years of a fixed rate term, most of the payment covers the interest and little is applied to the principal. For instance, on a $100,000 30 year fixed rate mortgage at 8%, it takes about 23 years before the balance is paid down to $50,000.

Fixed rate mortgages are a great option for people who like the stability of knowing their payment will never change. It is also a good option for people who think their income is going to remain flat. A nice feature of a fixed rate mortgage is that they rarely come with a prepayment penalty, which means if interest rates go down you are free to refinance.

Refinancing may help to reduce your monthly payments, however other factors must also be taken into consideration. The first is that closing costs are charged. Many times these costs can be included in the loan amount; however, the number of months it will take to recoup these costs must be weighed against the monthly savings that will be realized. Another factor is that the term of the loan will start over, and as mentioned above, most of the payment in the early years covers the interest. As a result, you may end up paying more interest in the long run.