Monday, May 30, 2016

Fixed Rate Mortgages


A mortgage in which the interest rate remains the same throughout the entire life of the loan is a fixed rate mortgage. These loans are the most popular ones, representing over 75% of all home loans. They usually come in terms of 30, 15, or 10 years, with the 30-year option being the most popular. While the 30-year option is the most popular, a 15-year builds equity much faster.

The biggest advantage of having a fixed rate is that the homeowner knows exactly when the interest and principal payments will be for the length of the loan. This allows the homeowner to budget easier because they know that the interest rate will never change for the duration of the loan.

Not only are fixed rate mortgages the most popular of home loans, but they are also the most predictable. The rate that is agreed upon in the beginning is the rate that will be charged for the entire life of the note. The homeowner can budget because the monthly payments remain the same throughout the entire length of the loan. When rates are high and the homeowner acquires a fixed rate mortgage, the homeowner is later able to refinance when the rates go down. If the interest rates go down and the homeowner wants to refinance, the closing costs must be paid in order to do so. Some banks wishing to keep a good customer account may wave closing costs. If a buyer buys when rates are low they keep that rate locked in even if the broader interest rate environment rises. However, home buyers pay a premium for locking in certainty, as the interest rates of fixed rate loans are usually higher than on adjustable rate home loans.

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