Everything You Need To Know About The Fixed-rate Mortgage
Buying a home for the first time can be intimidating. There is a lot of jargon you must’ve seen that can be confusing. You must’ve heard about having either a fixed-rate or an adjustable-rate mortgage. Your mortgage term can be either 15 years or 30 years. You could also have a custom mortgage term. You must decide for yourself what type of mortgage you need. You must understand what a fixed-rate mortgage is and how it works before choosing it. Please read this article to understand fixed-rate mortgages and their workings better.
What Does mean by Fixed-rate mortgage
The type of mortgage where you have a particular interest rate for the complete term of your home loan is called a fixed-rate mortgage. If you take a fixed-rate mortgage, a specific interest rate on your loan won’t vary over the loan term. The principal payment and the borrower’s interest will not change either and will be the same each month.
Fixed-rate mortgages are pretty standard since they do not get affected by any changes in the market. Since the interest rate is fixed, people prefer fixed-rate mortgages among other home loans.
How do fixed-rate mortgages work?
The name fixed-rate mortgage gives us a big clue about how these loans work. Your interest rate has been notably fixed on your home loan. The interest rate won’t change and will remain the same for the whole term.
Advantages of fixed-rate mortgages
Fixed-rate mortgages are prevalent and considered the backbone of the housing loan industry. There are many advantages to taking out fixed-rate mortgages, as mentioned below.
The significant advantage of a fixed-rate mortgage is that your interest rate is fixed and will remain the same every month till the end of the term. In a fixed-rate mortgage, the amount of money you have to pay for the loan towards your interest and principal does not change. However, there is one limitation to fixed-rate mortgages. If in the case of fluctuation in your property taxes or your insurance premium, your monthly payments will also change accordingly and add new costs. The lender has no control over these factors. But you can rest assured that the monthly payments you make towards your mortgage will generally cover these additional expenses. These other expenses will be put in an escrow account by your lender. They will pay them whenever it’s due. This is incredibly beneficial since it drastically reduces the chance for you to miss any vital insurance payment installment or property tax.
When you take out a home loan, you’ve probably heard amortization. Usually, home loans have a predetermined period that indicates when they will be paid off. For instance, if you take out a home loan with a fixed interest rate and a 30-year term, after 30 years of paying every month, your home loan will be paid off entirely. Since it is a fixed-rate mortgage, you would know precisely the amount of interest you would need to pay each month to pay off the home loan.
When you start paying off your home loan, during the initial years, most of your payments will be for paying off the interest instead of the original loan amount, the principal. For instance, if you take a fixed-rate mortgage with a monthly payment of 800 USD. When you make your first monthly payment towards this loan, you will pay 800 USD. However, around 750 USD would be going to pay off the interest. Only 50 USD will go towards paying off your original loan amount.
Although eventually, after some years, this balance changes and fixes itself. You will reach a point in time during the life of the loan where you are paying the same amount for the interest and the original loan amount. Around the end of your mortgage’s amortization, most of your monthly payments will pay off the original loan amount instead of the interest. You will reach a point where you will be paying around 750 USD towards the principal amount and only 50 USD for the interest.
Drawbacks of a fixed-rate mortgage
When you choose to go for a fixed-rate mortgage, you will have to pay higher than the introductory rate you receive on an ARM. You would have to pay a little more, but you ensure that you will have a fixed and affordable interest rate for the complete loan duration.
Duration of a fixed-rate mortgage
A loan term refers to the period of monthly payments you have to make to pay it off entirely. Most people prefer having a loan term of either 15 years or 30 years for a fixed-rate mortgage.
The 30-year-long loan term is more common among borrowers. Since the loan term is relatively long, you can manage to have low monthly payments, despite the slightly higher interest rate. Unfortunately, the longer your loan term is, the higher your interest rate. People prefer to go for longer termed loans like a 30-year loan term since it’s more sustainable. It is best for people who don’t want to shell out a large portion of their paycheck for monthly payments for years.
However, if you choose the 15-year loan term, you can save a considerable amount of money since the interest is lesser when compared with the interest rate on a 30-year loan term. Due to the shorter amortization period, the 15-year loan term is a better option if you want to save and pay less on interest. Many websites offer to calculate your monthly interest if you want to take a fixed-rate mortgage.
Taking a home loan is a massive step for anyone. There are many factors you need to consider and understand carefully before you decide to go through with it. A fixed-rate mortgage is prevalent in today’s world. If you decide to take a fixed-rate mortgage, you should first try to understand it thoroughly. You should know the different terms and understand how it works. Read through this article carefully to know everything about fixed-rate mortgages.