Fixed Rate Mortgage

What is a Fixed-Rate Mortgage?

If you’re just starting your search for a home and thinking of methods to finance it, there are plenty of ways to go about it. If you’re looking for an option that is stable in terms of payment, then Fixed-Rate Mortgage is your answer. 

With a fixed-rate mortgage, the total payment of the principal amount and interest stay the same throughout the duration of the loan. This not only offers stability but also allows you to set a specific budget aside for the payment. Lenders usually offer multiple options in terms of rates which can be either fixed, variable or adjustable. The fixed-rate is the most popular choice among these options and buyers are comfortable with the arrangement. Also if you plan to stay in a home for a longer period of time, a fixed-rate mortgage makes sense. 

Features of a Fixed-Rate Mortgage

Now that we’ve discussed the basics of a fixed rate mortgage, let us delve deeper into its features. A fixed rate mortgage offers several term options anywhere from 10 to 30 years. Since the interest rate remains constant regardless of the term duration, buyers have a low risk. Lenders, on the other hand, are faced with market fluctuation, inflation, and instability. To be paid a constant amount in such a situation increases their risk. With rising costs, the lenders earn diminishing profits over time and may have to forgo any margin they may be making, slowly and gradually.

Types of Fixed-Rate Mortgage Loans

Fixed-Rate Mortgage Loans can have different features and depending on your financial situation you can select what works best for you.

How Fixed-Rate Amortization Loans Work

As one of the most common types of mortgage loans in the market, the fixed-rate amortization loan is quite straightforward and easy to calculate. The buyer pays regular payments that include both the principal amount and interest. The payments are made according to a schedule and as the loan matures, the amount of principal to be paid increases as compared to the interest which remains constant.

How Adjustable Rate Mortgages Work

This type of fixed-rate mortgage combines the features of both fixed and variable rate loans. These differ from fixed-rate amortization loans on the basis of interest rate which is constant for a certain amount of time but changes after that time has passed. The arrangement in these loans is a little more complicated and if the rates fall, the buyer’s interest reduces over a period of time. 

How Non-Amortizing Loans Work

This is a loan arrangement where payment is made on the interest amount and the principal is paid in a lump sum. They are also known as interest-only or balloon-payment loans. In certain cases, lenders charge an annual deferred interest which is calculated yearly and depends on the buyer’s annual interest rate. 

If your non-amortizing loan is based on interest only then you will be paying interest and the principal is paid on a specific future date. 

The predictability that comes with a fixed-rate mortgage makes it great for most investors. However if you don’t plan on staying in your house for a long period of time, it may not be a good option for you. The upfront costs are also high and if your credit score is not high enough, you may not be able to qualify at all.