• When to choose a fixed-rate mortgage

  • Mortgage Advice & Articles

    With all the buzz these days about new mortgage options, it may be tempting to bypass a traditional fixed-rate loan when shopping for a mortgage. But often it’s the best choice. A fixed-rate mortgage offers you consistent monthly payments and an interest rate that doesn’t change during the life of the loan. This payment stability can mean less risk and less worry about the future.

    Basic features
    A fixed-rate mortgage is usually fully amortizing, meaning that your payments combine interest and principal in such a way that the loan will be fully paid off in a specified number of years.

    Available terms
    A 30-year term is the most common, although you may opt for a shorter term, usually at a lower interest rate, if you want to build equity more quickly and can afford a higher monthly payment. Or, if you want a lower monthly payment, 40-year terms are also available, usually at a higher interest rate.

    Interest rates
    The cost of your loan depends upon the interest rate you’re offered. It’s therefore important to compare offers from several lenders to be sure you’re getting the best deal. While market conditions determine the range of interest you’ll be charged, you determine the overall amount of interest based upon the length of term you choose. For example:

    Principal: $200,000
    Term: 30 years
    Interest rate: 6%
    Monthly payment: $1,199.10
    Total Payments: $431,677.03
    Total interest: $231,677.03

    Principal: $200,000
    Term: 15 years
    Interest rate: 5.75%*
    Monthly payment: $1,660.82
    Total Payments: $298,947.72
    Total interest: $98,947.72

    *In this example, the 15-year mortgage has an interest rate .25% less than the 30-year mortgage. Actual interest rates will vary.

    As you can see in the case of the above, paying an extra $461.72 per month to pay off the loan in 15 years, as opposed to 30, translates into an overall savings of $132,729.31 in interest payments. This benefit comes from the combination of the lower interest rate on the shorter-term mortgage and the fact that the interest is being charged over a much shorter period of time.

    Consider a fixed-rate mortgage if:

    • You are planning to stay in your home for a number of years.
    • You want the security of a regular monthly payment.
    • You believe that interest rates may rise.