Fixed Mortgages
There are 2 main types of conventional mortgage loans, those with fixed interest rates and those with adjustable interest rates.
A fixed-rate mortgage (FRM), also known as a “fixed-interest mortgage,” has a predetermined interest rate that stays the same throughout the life of the loan. Because the interest rate doesn’t change, the periodic mortgage payments don’t change either. Fixed mortgages are popular because they offer borrowers the stability of an unchanging monthly payment amount.
Fixed-rate mortgages are appealing because they protect borrowers against inflation and rising interest rates. On the other hand, if mortgage rates fall, your rate will not (unless you refinance your loan). The predictability of a fixed mortgage can help you manage your budget and set long-term goals, since you basically know what your monthly mortgage expenses will be for the next 15 to 30 years.
On a fixed-rate mortgage, a portion of each monthly payment goes towards interest (the lender’s charge for borrowing money) and the rest goes towards principal (the original loan balance). In the early years, the majority your mortgage payment is applied to the interest you owe – but over time, the portion that goes towards principal will increase. This method of repayment is called “amortization.” The more principal you’ve repaid, the more equity you have in your home. Keep in mind that amortization can limit homebuyers from building equity quickly (especially those with longer loan terms), and having little or no equity in your house will make you more susceptible to foreclosure.
In general, the shorter the loan term is, the lower the interest rate will be. The two most popular types of fixed mortgages are the 15-year and the 30-year (although some lenders may offer shorter or longer terms). Be sure to ask if the loan comes with a “prepayment penalty” clause, which means the lender will charge extra fees if you pay off the loan balance sooner than originally agreed.
The most appealing aspect of a fixed-rate mortgage is its predictability. Fixed mortgages are usually best for people with steady incomes who plan on staying in their home for at least 7 to 10 years.