Fixed Rate Mortgages
If planning to stay in your home for an extended period of time, a fixed-rate mortgage is probably a wise decision. A fixed-rate mortgage is a good standard to compare other mortgage products. This type of mortgage features a fixed-rate for the life/duration of the loan term, making payments of both the principle and interest the same from the first mortgage payment to the last mortgage payment.
There are a few different options available when considering a fixed-rate mortgage. Most commonly, a 30 year fixed-rate mortgage is selected, although a 20 year, 15 year, and 10 year terms are also available. When choosing a loan term, keep in mind that with a fixed-rate mortgage, the interest rate paid, will be locked in for the loan term, meaning it will not go up or down with the current market interest rate. Finally, as long as the mortgage payments are made on time, the loan will be paid in full after the loan term (10 year, 15 year, 20 year, 30 year, etc.) has passed.
10 Year Fixed-Rate: 10 year fixed rate mortgages have the highest monthly principle and interest payment of all the other fixed-rate mortgage products, because the life of the loan or the loan term is the smallest. However, the interest rate for this mortgage product can be lower than all the others, due to the loan being paid off much faster. 10 year fixed-rate mortgages also allow the borrower to build equity faster and pay much less in interest over the loan term.
15 Year Fixed-Rate: 15 year fixed-rate mortgages have a slightly lower payment than 10 year fixed-rate mortgages and allow for faster equity build-up, a slightly higher interest rate, a longer pay off term, and a lower mortgage payment.
20 Year Fixed-Rate: 20 year fixed-rate mortgages have a slightly lower payment than 15 year fixed-rate mortgages. However, payments will most likely be higher than the 30 year fixed-rate mortgage.
30 Year Fixed Rate: The 30 year fixed-rate mortgage gives the borrower a fixed-rate for the entire 30 year term. By making the scheduled principle and interest payments, the borrower will have paid the loan in full at the end of the 30 year term. Mortgage payments will be smaller than the 10 year, 15 year, and 20 year fixed-rate mortgages, because the term is longer.
40 Year Fixed Rate: 40 year fixed-rate mortgages are generally considered to be a specialty mortgage product. The mortgage provides a fixed-rate for the term of the loan and once the borrower has paid each principle and interest payment of the entire term of the loan, the mortgage will be paid in full. The 40 year fixed-rate provides the borrower with the smallest possible principle and interest payment, because the loan term is the longest.
Fixed-rate mortgages generally also allow the borrower to pay off the mortgage before the loan term is up, without paying a pre-payment penalty. The borrower can also add money to the monthly payments, which will pay off the loan faster. When obtaining a fixed-rate mortgage, keep in mind that a longer term usually means a lower monthly payment.