Fixed Rate Mortgage

 

A “fixed-rate mortgage” is the most ordinary and uncomplicated mortgage available to homeowners today. As the name suggests, the interest rate on a fixed mortgage does not change during the entire duration of the loan, which is typically 30 years.

For that reason, fixed-rate mortgages do not have associated mortgage indexes, margins, or caps, because they are not variable-rate loans. Another key characteristic of the fixed-rate mortgage is that monthly mortgage payments remain constant throughout the life of the loan, to the very last month when the loan is finally paid off.

Types of Fixed-Rate Mortgages

The most common type of fixed-rate mortgage is the 30-year fixed, which amortizes over thirty years, with the majority of early payments going toward interest, and the bulk of later payments going toward principal.

The next most popular fixed mortgage is the 15-year fixed loan, which amortizes over fifteen years, bumping up monthly mortgage payments significantly, but reducing the amount of interest paid throughout the duration of the loan considerably.

Many banks and mortgage lenders also offer 10, 20, and 50-year fixed loans as well, though they are far less popular and widespread.

Fixed Mortgages with Interest-Only Options

Some fixed-rate mortgages also feature interest-only periods, which allow homeowners to make interest-only paymentsduring the first five to ten years of the loan duration, though the loan will recast to make up for any reduced payments during that period.

In other words, payments after the interest-only period expires will be higher to compensate for lower payments made early on.  However, the mortgage is still considered “fixed.”  It is simply recast to reflect the remaining number of months and the associated mortgage balance.

Fixed-Rate Mortgage Benefits

Fixed-rate mortgages are beneficial for a number of reasons, though the fact that your mortgage payment will never change is clearly paramount.

If interest rates rise, homeowners with adjustable-rate mortgages will suffer the consequences of higher monthly mortgage payments, while fixed-rate borrowers can rest assured that their payments will not change.

Fixed mortgage borrowers won’t need to worry too much about where the market is headed either, though it’s wise to monitor interest rates in case a sizable interest rate drop makes it favorable to refinance.

But generally, it’s a pretty stress-free loan choice, and one that’s favored by many government programs for its stability and clear-cut nature.

One Downside of a Fixed Mortgage

The only real negative aspect of a fixed-rate mortgage is the higher interest rate, although these days many fixed mortgages price at the same rate or even lower than adjustable-rate mortgages.

Another small negative associated with a fixed-rate mortgage is the idea that many homeowners will fail torefinance  when a good opportunity comes around because they’re so obsessed with holding on to their low fixed rate.

Basically a homeowner with a fixed mortgage may avoid refinancing in fear of losing that fixed-rate, whereas an ARM-borrower is always keen to shop around.

But all in all, fixed mortgages are a good choice for a wide range of borrowers because of the relative low risk and lack of surprise.

Check out the chart below, which illustrates the interest rate movement of the popular 30-year fixed-rate mortgage over the course of 2010: