Fixed Rate Mortgage Loans
These days, mortgage loans come in all shapes and sizes, to accommodate increasingly complicated finances and housing markets. However, many customers still choose to go with a classic: the fixed rate mortgage.
What is a fixed rate mortgage?
A fixed rate mortgage loan is just what it sounds like – a mortgage with a fixed interest rate, as opposed to other mortgage loan types with variable or "floating" interest rates. With a fixed rate mortgage, the interest rate is not tied to an index; instead, it increases in pre-established increments (usually ¼ or ? percent at set intervals).
Fixed rate mortgages are usually set up as 15- or 30-year loans. Shorter terms are available, however, and in some more expensive housing markets, like California and Florida, 40- and 50-year loans are becoming popular as well.
Some nontraditional loan types – such as graduated payment mortgages, negative amortization mortgages, balloon payment mortgages, and more – can include a fixed rate period as well. Such loans, incorporating a fixed rate for part but not all of the loan lifetime, are often called hybrid loans.
How are monthly payments for a fixed rate mortgage determined?
One advantage of fixed rate mortgages is that, with the right information, buyers can determine their exact monthly payments for the life of the loan. Adjustable rate mortgages, on the other hand, vary with the index, and therefore such calculations are impossible beyond a few years.
Keep in mind that fixed rate mortgage amounts do not include additional costs often associated with home-buying, such as property insurance, property taxes, and other escrow matters. Therefore, buyers should remember to consider these costs when determining payments.
Fixed rate mortgage payments are determined by the interest rate, including compounding frequency, amount of loan, and mortgage terms. A buyer who knows these factors can calculate monthly payments from there.
What are the pros and cons of fixed rate mortgages?
Fixed rate mortgages are valuable for their consistency and their simplicity. Furthermore, a fixed rate mortgage protects home-buyers against rising interest rates; in essence, lenders assume the risk of increased interest rates instead of borrowers. Of course, if interest rates decrease, fixed rate borrowers will not reap the benefits of that decrease; their interest rate will remain the same.
Fixed rate mortgages are often more expensive (on the outset at least) than adjustable rate mortgages, because long-term fixed rate loans are usually accompanied by a higher interest rate than short-term, adjustable loans. This is to compensate mortgage lenders for assuming the risk of rising interest rates.
In other words, the advisability of a fixed rate mortgage depends on many factors – the borrower's situation and financial personality, the loan terms, the current interest rate, and interest rate projections over the lifetime of the loan. Borrowers who prefer stability might rather risk paying more for a fixed rate loan than deal with the fluctuations of an adjustable rate mortgage. Borrowers who purchase homes in markets where interest rates are expected to rise should also strongly consider a fixed rate mortgage, to avoid incurring an increasingly higher interest rate on their loan.
As with all financial decisions, borrowers interested in fixed rate mortgage loans should seek advice, research their options, and compare offers to ensure that they find the best mortgage loan for them.
California Bad Credit Loans