Is a Fixed Rate Mortgage for You?
Steady and Predictable: Fixed Rate Mortgages
Fixed rate mortgages are always offered as options for home financing. Get the details on fixed rate loans and decide if this type of mortgage fits your financial plan.
Home loans come in many different packages and even during periods when the mortgage market is unstable, you will always find fixed rate mortgage options.
Fixed Rate Terms
A fixed-rate loan gives you a set interest rate and a set term. The term of a loan is the number of years in which you will pay the loan off and typical fixed terms are 30-year and 15-year fixed rate loans, although 10- and 20-year loans exist as well. Shorter loan terms require a larger monthly payment, and the inverse is true of longer loan terms with lower monthly payments.
While you will pay less each month on a loan payment with a longer term you will also pay more in interest. The amount of interest on a 30 year loan is staggering if the loan is not paid off before 30 years, although income tax deductions for mortgage interest help to alleviate some of this burden.
Fixed Rate Mortgage Perks
Depending on market conditions and promotions from your mortgage lender, the initial payments on adjustable rate mortgages (ARMs) may be substantially lower than fixed rate loans, making the ARMs very enticing. However, once the teaser interest rate ends, you could find yourself in a very different financial climate than existed at the start of the loan.
The primary advantage of a fixed rate loan is that monthly principal and interest payment do not fluctuate, making the loan payment easy to budget for. While the interest rates on fixed loans are typically a bit higher than other types of mortgage loans, the stable payment may be worth it to you.
Working the 30-Year Fixed Rate Mortgage
Many financial planners feel strongly about going with a fixed rate mortgage with a shorter period, usually citing a 15-year loan as being the "fixed rate loan of choice". A shorter loan gives you substantial savings on interest payments, but that higher payment can leave your financial plan looking bleak if your income is reduced or you have high unexpected expenses.
You can still save on interest with a 30-year fixed rate mortgage. First, ensure that there is no prepayment penalty on the 30-year loan you are considering, then plan to pay extra on each month's payment so that you pay the loan off in 15 years. By doing so, you will not save quite as much in interest as you would on a 15-year fixed rate mortgage, but you will save tens or hundreds of thousands of dollars or more in interest. Furthermore, should you lose a job or have other unforeseen strains on your finances, you have the cushion of only making the required loan payment until your finances are in order again.
The Mortgage Loan Prepayment Difference
For example, a $200,000 30-year fixed rate loan at 8% requires a $1,467.53 payment in principle and interest. Make an extra $450 payment each month and you will pay the loan off in 15 years and you will save $185,306.97! On top of saving all that interest, you will increase the equity (market value less your outstanding loan) you have in your home rapidly by prepaying on your loan regularly.
Test this out for yourself with the Fixed Mortgage Loan Calculator at William Raveis Mortgage, LLC. Plug in your loan information, then prepayments using monthly as the type, the extra monthly payment amount and start with payment 1.
A fixed rate mortgage loan may seem rather boring compared to other loans with smaller downpayments or a lower initial monthly payment. But, you always know where you stand with a fixed rate mortgage and if you prepay your fixed rate loan with no prepayment penalty the savings are anything but boring.
Have you decided on the right type of mortgage financing for your personal financial plan? Talk to banks and mortage brokers to determine what mortgage financing they offer to find the best interest rates in your area.
