A fixed-rate mortgage is a home loan that has a stable interest rate over a predetermined length of time. More specifically, the rate of interest never varies, but rather, always stays the same over the lifetime of the loan. The most common terms for fixed-rate mortgages are 10, 15, and 30 years.
The majority of home loans are fixed-rate loans with the 30-year term being the most popular. The longer the term of the loan, the smaller the monthly payment will be. Additionally, the longer the term of the loan, the greater the amount of interest, spent over the lifetime of the loan, will be.
Likewise, the shorter the term, the larger the monthly payment will be. However, the loan will be paid off more quickly and a substantial savings in the amount of interest spent will be realized.
Since the rate of interest calculated remains constant for the duration of the loan, the monthly payment will always be the same amount. Typically, this type of loan is very popular when interest rates are relatively low. If the interest rate is sufficiently low, the opportunity to lock in at that rate is quite appealing, particularly to homeowners who intend to stay in their particular home for a long time.
Several advantages are clearly presented with this type of loan. The interest rate is locked in and so it never changes. The borrower never has to be concerned with fluctuating interest rates. Additionally, the monthly payment does not vary over the years. Therefore, no surprises are in store for the homeowner.
A 30-year fixed rate mortgage has an additional advantage over the shorter-term fixed-rate mortgages. A longer term equates to smaller monthly payments. This can make a higher priced home more easily affordable to a prospective buyer. Additionally, since the payments are smaller with a longer term, money is more readily available for other expenses.
Likewise, this loan is not without a few minor disadvantages. Since the interest rate is fixed, any decrease in existing interest rates will not be reflected in the loan. Generally, a 30-year mortgage comes with a slightly higher interest rate than a shorter-term mortgage. The difference, however, is usually inconsequential.
In addition to slightly lower interest rates with a shorter-term fixed-rate mortgage, equity is built up in the home much more quickly. Since the payments are larger, the amount of the payment that goes to the principal is larger. Therefore, the equity is built up more quickly, the loan is repaid more quickly, and the amount of interest paid decreases more quickly.
Several factors affect the amount of the monthly payment of a fixed-rate mortgage. The term, the interest rate, and the amount of principal all play into the process that determines the final number.
The term of the fixed loan, once decided, remains the same throughout the duration of the loan. The interest rate, also once selected, remains steady. The principal, or the amount of money that an individual borrows, also helps to determine the amount of money that must be paid back on a monthly basis. The more money that an individual borrows, the larger the payment, by necessity, will be.
The fixed rate mortgage offers a certain level of security through its set interest rate. It offers a certain level of flexibility initially with its wide span of terms, including 10, 15, 20, and 30-year terms. It also offers predictability with a stable mortgage payment throughout the duration of the loan.
Traditionally, no penalties are imposed for early repayment or prepayment on fixed-rate mortgages. Therefore, the homeowner may benefit from making additional payments and increasing the equity of the home, while decreasing the lifetime of the loan.
A fixed-rate loan is simple and easy to understand with a few basic facts. A fixed-rate loan allows the borrower to lock in at a particular, specified interest rate for a specified time frame. Hence, the interest rate and the payment amount never change. The amount of the monthly payment that goes to the principal amount of the loan increases slightly as the amount of the monthly payment that goes to interest decreases slightly with each additional payment. The entire loan is paid off by the end of the predetermined term.