What Is A Fixed-Rate Mortgage
A fixed rate mortgage is a home loan with a fixed interest rate and a fixed mortgage payment every month for the duration of the loan that is typically 10 to 30 years.
A fixed rate mortgage is the commonest kind of a home loan.
In a fixed-rate mortgage the lender allows the consumer to lock in a certain rate of interest for a certain duration. The longer that you want to lock in the current rate of interest the more you will probably need to pay in terms of certain charges. This is for the privilege of having a steady interest rate which is not affected by volatile market conditions.
For example someone who chooses to lock in the current interest rate for five years may have to play certain pre-bid charges while someone who chooses to block in the interest rate for a period of six months might not have to.
For a person who chooses a lock in period of five years will have his mortgage and interest-rate adjusted after five years whereas someone who chooses six months as the duration of the fixed-rate will have it adjusted after six months.
The benefit of a fixed rate mortgage is that it offers the benefit of a variable rate mortgage along with a certain predictability and steadiness in controlling the monthly payments on a mortgage. The important part is that your lender should allow you to vary the period for which you want your interest rate to be locked in.
For example, even if you are opting for a six-month of fixed interest rate period, if you anticipate a sharp rise in the interest-rate in the future lender should allow you to lock in the current interest rate for a period of next five or 10 years without charging you an extra penalty fee.
If the rates really go down in the future and you feel that you paying much more than you ought to, you can refinance your home loan. However, the saving should be worth the cost and fee of refinancing the loan.
Should You Choose a Fixed Rate Mortgage?
You should discuss your particular situation with a helpful lender.
Generally, you’ll find that fixed rate mortgages are the right choice if:
- You think interest rates are low.
- You can afford the payment for the house you want.
- You need to budget for and predict monthly payments.
- You will keep your home for a relatively long period of time.
Fixed mortgages usually come at a higher price than other kinds of mortgages. For example, the initial offer rate on an adjustable rate mortgage is often very low and attractive.
However, there will always be an increase once the promotional period is over. And then there is always the possibility of future fluctuations as per the fluctuations in the index rate. Learn everything about ARM’s in this post.
Advantage of Choosing A Fixed Rate Mortgage
- A fixed rate mortgage offers security to the borrower as the payment remains constant about the tenure of the mortgage. Fluctuations in the interest rate in the economy does not affect the borrower. He continues to enjoy the same interest rate that he signed up for in the mortgage contract.
- If the interest rate in the economy increases the borrower continues to pay the low interest rate and if the interest rate decreases the borrower may have the option of refinancing the mortgage into a low rate.
- Most of the fixed-rate mortgages allow the borrower to make lump-sum payments directly towards the principle of the loan. This allows the borrower to pay off the mortgage quicker and save on the interest payable.
Effect Of Making Frequent Or Lump Sum Payments
The borrower can choose to make the lump-sum payment according to the terms and conditions decided with the home loan lender. Additional lump-sum payments or additional by monthly payments are not compulsory and are usually a matter of choice on the behalf of the borrower, and whether the loan contracts allows it.
You should always try to have a prepayment and lump sum payment clause in your mortgage loan. It’s good to have that option. Read the two short scenarios below to see what a dramatic effect a simple change in your payments can have on your home loan savings.
- Paying half the monthly mortgage payment every two weeks will pay off a 30 year fixed rate mortgage in about 22 years.
- One extra payment per year will reduce the amortisation period of a 30 year mortgage to 26 years.
The biggest advantage of a fixed rate mortgage is that you can plan paying for it well in advance. You can budget and organize your fans is in such a way so as to have a complete comfortable there is in keeping with the payments in the future. This is because you know exactly how much you’re going to pay for it in the future as well
There are a few disadvantages of a fixed-rate mortgage as well.
- You cannot take advantage of a falling interest rate in the future in without refinancing. Refinancing takes time and costs money.
- Fixed-rate mortgages are not assumable. If you want to sell while still paying off the home loan, the buyer has to get his own financing. However, it is not easy to find an assumable ARMs as well.
- If your fixed rate mortgage comes with a prepayment penalty, you might find it very expensive to pay it off sooner.
Tips For A Good Home Loan Experience
Just because a fixed rata mortgage is predictable in terms of payment schedule, doesn’t mean that the offers do not vary from one lender to another. As always shop around a bit to find the arrangement that suits you the best. These are a few tips to ensure that you have a smooth experience with your loan during the inception of the contract as well as later.
Always have the phone number you can call in case there are any questions or problems in the future. This number should not be just a call center number for a large institution. It should be the number of the person you ultimately interview for a direct phone number, fax number and e-mail address.
Details of the person you deal with
In most cases you’ll be dealing with a loan officer from the lending institution. This is the person that you should be able to call and check up with regarding the progress of your loan.
A loan processor is the person who handles all the paperwork concerned with the loan from the time that you submit your application to the time the loan is closed. Loan processor’s jobs includes conducting credit investigation and preparing loan documents. If possible get the loan processor’s direct phone number, fax number and e-mail address.
If any problem arises in the future dates could prove important.
Loan program name
If the mortgage lender has a particular name for the mortgage they are qualifying you for, you should have that name. It makes for easier reference.
What is the interest rate that the lender is quoting along with the annual percentage rate?
What is the number of points that are being charged for a particular interest rate. A quote of an interest rate without a quote of points is quite meaningless.
Ask the lender to identify and itemize all lists of fees and charges that are applicable to your loan application such as processing fee, credit report, appraisal fee and others.
Required down payment
In most cases you’ll be required to make at least 20% to avoid taking the private mortgage insurance. However, if you’re agreeable to taking private mortgage insurance you can have a downpayment as less as 5 to 10%. However, this is rare with regular mortgage lenders.
To find lower down payments limits, one can usually do better with an FHA mortgage.
Loan amount allowed
Getting a certain interest rate and other favourable terms and conditions is no good if you are not being lent to amount your need. Ask the lender how much amount he is willing to give.
We strongly urge you to avoid a prepayment penalty clause in your contract. Ask a mortgage lender if there is any prepayment penalty clause in your home loan contract. The lender is bound to reveal this in the “truth in lending disclosure” form that is handed over to the borrower.
Is The Loan Assumable?
Finding an assumable home loan is quite difficult in today’s date. All VA loans are assumable. With an assumable loan, the borrower can pass off the mortgage to the person when he sells his house. The mortgage continues on the same terms that were applicable for the first home owner.
Estimated monthly payment
How much are you going to pay each month for a mortgage?