Fixed-Rate Mortgages

For decades, fixed-rate mortgages, the most classic and popular type of mortgage loans, have been the pillar of the home loan industry.  Today, prospective homeowners from all walks of life continue to rely on these home loans, which offer them security and stability.  Fixed-rate mortgages allow borrowers to lock in the initial loan rates for the term of the loan and to repay the debt in monthly payments.  Fixed mortgage rates are determined in advance and typically run in increments of 1/4 or 1/8 percent.  Although the most common amortization periods are 15 and 30 years, shorter and longer terms (i.e. 40 and 50-year fixed-rate mortgages) are currently available, especially in areas with high real estate appreciation where the 30-year term is not financially accessible to a middle-class family.  During the loan's early years, repayment of fixed-rate mortgages is applied to interest payments.  Toward the end of the loan term, a bulk of the monthly payment is allocated to the principal.   

Mortgage brokers may allow their customers to prepay principal in advance and penalty-free.  By making early payments of a portion of the principal, borrowers will be able to lower the loan's total cost and shorten the repayment period.  Both 30-year and 15-year fixed-rate mortgages boast attractive features.

30-Year Fixed Rate Mortgages

The advantages that 30-year fixed-rate mortgages offer consumers are as follows:

1. Borrowers are granted the opportunity to borrow funds for a lengthy period of time without needing to cope with fluctuations in payments or real estate rates.
2. In comparison to 15-year fixed-rate mortgages, 30-year mortgage applicants will be required to make lower monthly payments because the interest will be amortized over a longer term.  On shorter-term mortgages, borrowers make higher monthly payments and repay the principal in a shorter time frame.
3. Lower monthly payments translate into more available funds for borrowers to allocate to high-yielding investments.
4. Higher mortgage rates enable borrowers to claim a higher tax deduction, decreasing or even wiping out their federal income tax liabilities.

15-Year Fixed Rate Mortgages

By contrast, 15-year fixed-rate mortgages offer consumers the following advantages:

1. Shorter amortization schedules allow borrowers to build equity more rapidly.
2. Interest rates are substantially lower than those on longer-term mortgage loans.
3. Since borrowers pay a larger portion of the principal with each mortgage payment, they pay considerably less overall for shorter-term mortgages.

Fixed-rate mortgages offer numerous benefits to borrowers.  First, consumers who value stability are granted the security of knowing precisely how much interest and principal they must pay each month.  Secondly, they protect prospective homeowners from unexpected and potentially significant hikes in their monthly payments when interest rates increase.  Fixed mortgage rates shield borrowers from the effects of upward changes in real estate rates since the cost of the fixed-rate mortgage remains constant.  This is due to the fact that the lending institution has agreed to assume the interest rate risk on a fixed-rate loan.  Thirdly, when interest rates drop, a fixed-rate mortgage becomes even more attractive to and very affordable for consumers since it offers them the opportunity to lock in favorable rates for many years.  If interest rates decrease, borrowers have the option of refinancing their home loans into a lower rate.  They can also decide to increase their monthly payment and allocate the additional portion of the payment toward satisfaction of the principal, which in turn will lower the loan's principal balance much quicker.  Fixed-rate mortgages also vary little from one creditor to the next and are easy to understand.  Consumers know from the onset the mortgage rates that will be assigned for the entire term of the loan and the amount of their monthly payments.  Finally, fixed-rate mortgages facilitate budgeting for borrowers since the total payment remains constant.

Compare Mortgage Loan Rates:

• 100 Percent Financing Loan
• Adjustable Rate Mortgage
• Conforming Loan
• Fixed Rate Mortgage
• Interest Only Mortgage
• Second Mortgage
• Subprime Mortgage