Fixed Rate Mortgage

A common type of mortgage loan is the fixed rate mortgage.  With this loan, your payments and interest do not change for the term of the loan.

Fixed rate mortgages come in different packages.  The most common is the 30-year fixed.  However, other terms are available.  By getting a 15 or 20-year fixed mortgage, the loan is paid off more quickly.  You get a lower interest rate with these terms and you can build equity in your home at a faster rate because you are paying more money toward the principal each month.  However, your monthly payment most likely would be higher than with a 30-year fixed.  A somewhat newer option is a 40 or 50-year fixed mortgage.  These offer lower monthly payments but have a higher interest rate.  More of your monthly payment goes toward paying interest instead of principal.

No matter what the term of a fixed rate mortgage, all are fully amortizing.  This means that the principal and interest are combined so that the full amount of the loan is paid off after a set amount of years.  For example, if you have a 30-year fixed mortgage, at the end of the 30 years, the loan will be fully paid off, assuming that you have made no changes to the loan.

When applying for a fixed rate mortgage, you may encounter the term discount points.  Discount points refer to fees paid upfront to get a lower interest rate.  One point equals one percent of the loan amount and usually buys down the interest rate 0.25 percent.  For example, if you are looking at getting a loan for $200,000 at a 7 percent interest rate, you can purchase 2 points at $4,000 to get an interest rate of 6.5 percent.

The amount of the down payment determines whether or not you will have to pay private mortgage insurance (PMI).  Usually if you obtain a mortgage but put down less than 20 percent, you are required to pay PMI.  This is to protect the lender in case you default on the loan.  Once you have paid 20 percent of the principal of the loan, you can contact your lender to stop paying PMI.

A fixed rate mortgage can be a good option for buying a home.  If you plan to stay in the home for a very long time, a fixed mortgage may be right for you.  You have the security of knowing what your payment will be each month since the interest rate will not change.  If it looks like interest rates are going to rise, a fixed rate mortgage can be a better option than an adjustable rate mortgage (ARM), which has an interest rate that changes at set intervals.  You can secure your interest rate before they rise and keep that rate for the term of your loan.