A fixed-rate mortgage (FRM) is a type of mortgage loan characterized by an interest rate which does not change over the life of the loan. A 30-year FRM is simply a fixed rate mortage that last for 30 years. But there are other lengths of time, including 10 and 15 year FRMs.
30-year fixed mortgage Explained
A 30 year fixed mortgage is possibly the most common type of mortgage loan. It has several characteristics that make it such a popular choice when financing a home purchase.
One of the key features of a 30 year fixed mortgage is its fixed interest rate. If you are able to lock a great interest rate when getting the mortgage, you are set. That is the rate for the next 30 years, assuming that you own the house that long.
Another attractive characteristic of a 30 year fixed mortgage is its relatively low monthly payment. Since repayment of the loan is stretched out over 30 years, that keeps the monthly payment from getting too high.
The monthly payments are the payments that you make toward the principal and the interest to pay off the loan. A fixed rate mortgage is a fully amortizing loan. That means that the principal and interest combine so that the full amount of the loan is paid off after a set amount of years. With a 30 year fixed rate mortgage, the loan is fully amortized, or paid off, after 30 years as long as no changes have been made to the terms of the loan.
For example, you want to purchase a house for $200,000. You have saved enough to put down 20 percent, so your loan amount is $160,000. At a 7 percent interest rate, your monthly payment will be $1,064.48. You can also put down less than 20 percent. Let's say you only have 10 percent for a down payment. Now your loan amount will be $180.000 with monthly payments of $1,197.54. However, usually you have to pay PMI (private mortgage insurance) when you put down less than 20 percent. PMI makes your monthly payment higher.
One drawback, as with any loan, is that you repay more than you borrowed. This is because of having to pay interest. After thirty years, this can really add up. For example, on that $160,000 loan, you pay $223,217.48 in interest alone by the end of the term of the loan. Including the principal brings the total amount paid for the loan to $383,217.48. However, if you move or refinance before the term of the loan expires, you obviously do not make all of those interest payments.
A 30 year fixed rate mortgage can be a good option for financing a home purchase. If you intend to stay in the house for many years, it may be the right loan for you. If it is important to keep your monthly payments low and manageable, the 30 year mortgage can help you to do that. It is a good, safe choice for a mortgage loan since it is probably the most popular mortgage product.