Fixed-Rate Mortgage

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What Is A Fixed Rate Mortgage?

The term “fixed-rate mortgage” refers to a home loan that has a fixed interest rate for the entire term of the loan. This means that the mortgage carries a constant interest rate from beginning to end. Fixed-rate mortgages are popular products for consumers who want to know how much they’ll pay every month.

  • A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan.
  • Once locked in, the interest rate does not fluctuate with market conditions.
  • Borrowers who want predictability and/or who tend to hold property for the long term tend to prefer fixed-rate mortgages.
  • Most fixed-rate mortgages are amortized loans.
  • In contrast to fixed-rate mortgages are adjustable-rate mortgages, whose interest rates change over the course of the loan.

How Does A Fixed Rate Mortgage Work?

Potential borrowers need to complete an official mortgage application (and usually pay an application fee), then supply the lender with the necessary documents to perform an extensive check on their background, credit history, and current credit score.

Several kinds of mortgage products are available on the market, but they boil down to two basic categories: variable-rate loans and fixed-rate loans. With variable-rate loans, the interest rate is set above a certain benchmark and then fluctuates—changing at certain periods.

Fixed-rate mortgages, on the other hand, carry the same interest rate throughout the entire length of the loan. Unlike variable- and adjustable-rate mortgages, fixed-rate mortgages don’t fluctuate with the market. So the interest rate in a fixed-rate mortgage stays the same regardless of where interest rates go—up or down.

Most mortgagors who purchase a home for the long term end up locking in an interest rate with a fixed-rate mortgage. They prefer these mortgage products because they’re more predictable. In short, borrowers know how much they’ll be expected to pay each month, so there are no surprises.

Fixed Rate Terminology

The mortgage term is basically the life span of the loan—that is, how long you have to make payments on it.

In the United States, terms can range anywhere from 10 to 30 years for fixed-rate mortgages; 10, 15, 20, and 30 years are the usual increments. Of all the term options, the most popular is 30 years, followed by 15 years.

How To Calculate A Fixed Mortgage?

The actual amount of interest that borrowers pay with fixed-rate mortgages varies based on how long the loan is amortized (that is, how long the payments are spread out for). While the interest rate on the mortgage and the amounts of the monthly payments themselves don’t change, the way that your money is applied does.

Mortgagors pay more toward interest in the initial stages of repayment; later on, their payments are going more into the loan principal.

So, the mortgage term comes into play when calculating mortgage costs. The basic rule of thumb: The longer the term, the more interest that you pay. Someone with a 15-year term, for example, will pay less in interest than someone with a 30-year fixed-rate mortgage.

Crunching the numbers can be a bit complicated: To determine exactly what a particular fixed-rate mortgage costs—or to compare two different mortgages—it’s simplest to use a mortgage calculator.

Fixed Rate Mortgage Advantage And Disadvantages

Varying risks are involved for both borrowers and lenders in fixed-rate mortgage loans. These risks are usually centered around the interest rate environment. When interest rates rise, a fixed-rate mortgage will have lower risk for a borrower and higher risk for a lender.

Borrowers typically seek to lock in lower rates of interest to save money over time. When rates rise, a borrower maintains a lower payment compared to current market conditions. A lending bank, on the other hand, is not earning as much as it could from the prevailing higher interest rates—foregoing profits from issuing fixed-rate mortgages that could be earning higher interest over time in a variable-rate scenario.

In a market with falling interest rates, the opposite is true. Borrowers are paying more on their mortgage than what current market conditions are stipulating. Lenders are making higher profits on their fixed-rate mortgages than they would if they were to issue fixed-rate mortgages in the current environment.

Of course, borrowers can refinance their fixed-rate mortgages at prevailing rates if those rates are lower, but they have to pay significant fees to do so.

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