Fixed Rate Mortgages
Fixed rate mortgages allow a borrower to know what all future monthly payments will be. Because the interest rate is fixed, your payments will not vary when you use a fixed rate mortgage.
With a fixed rate mortgage, you calculate how long it will take to pay off all the principal and interest, and you arrive at a monthly payment. You will pay the same monthly payment through the entire term of the fixed rate mortgage. Of course, if you sell your home before the end of the term, you can just pay off the balance that you owe.
Fixed Rate Mortgage Choices
There are two main types of fixed rate mortgages:
- 30 Year Fixed Rate Mortgages
- 15 Year Fixed Rate Mortgages
Other terms (such as 10 or 20 Year Fixed Rate Mortgages) exist but they are not as commonly used.
The chart below illustrates the rate discrepancy between 15-year and 30-year mortgages from 2000–Today.
Fixed Rate Mortgage Advantages
Fixed rate mortgages are helpful because they allow you to predict what your housing payments will be in the future. No matter what happens with interest rates, your payments won't change if you've used a fixed rate mortgage. However, payments can change with other risky mortgages.
Fixed Rate Mortgage Disadvantages
With a fixed rate mortgage, you typically have a higher monthly payment than you might have with some of the other mortgage choices. That is because the fixed rate mortgage offers you the safety of knowing that your payments will not increase. Because lenders don't know what will happen with interest rates over the next 15 to 30 years, they charge you for this luxury.
Should You Use a Fixed Rate Mortgage?
You should discuss your particular situation with a talented and helpful lender. Generally, you'll find that fixed rate mortgages are the right choice if:
- You think interest rates are low
- You can afford the payment for the house you want
- You need to budget for and predict monthly payments
- You will keep your home for a relatively long period of time
Getting the Best Fixed Rate Mortgage
To get the best-fixed rate mortgage you just need to shop around and do your homework. Ask for quotes from several lenders, and ask your friends and associates if they can refer an honest lender.
Fixed rate mortgages can have a variety of fees built into the final payment that you are quoted. Ask for a written, itemized explanation of what fees you are paying and why. It never hurts to ask if the lender will waive a fee or two. If you are a good borrower or if you're making a large purchase, your chances are better.