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| Fixed Rate Mortgage | ||||||
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Although you may see many different types advertised, they all belong to just two families: those mortgages that carry fixed interest rates, and those whose rates change during the course of the loan on a periodic schedule mutually agreed upon by you and your lender. Fixed Rate Mortgages
When people thought of a mortgage 10 to 50 years ago, they thought of a 30-year fixed rate mortgage. This traditional favorite is not the only choice nowadays because volatile financial times created a whole new range of selections. However, the 30-year fixed rate mortgage may still be the best mortgage for your circumstances. It offers the lowest monthly payments of fixed rate loans, while providing for a never-changing monthly payment schedule. Some lenders offers 25, 20, and even 40-year term mortgages as well. But remember, the longer the term of the loan, the more total interest you will pay. The 15-year fixed rate mortgage allows homeowners to own their homes free and clear in half the time and for less than half the total interest costs of the traditional 30-year loan. The loan's term is shortened by the 10 percent to 15 percent higher monthly payments. Some homebuyers prefer this mortgage because it allows them to own their home before their children start college. Others prefer it because they will own their home free and clear before retirement and probable declines in income. The major disadvantages or the 15-year fixed rate mortgage are the sometimes higher monthly payments. But if saving on total interest costs and cutting the time to free and clear ownership are important to you, the 15-year fixed rate mortgage is a good option. Some newer mortgages afford homebuyers some the best qualities of the fixed rate and adjustable rate mortgages. One new type of loan, often called a Two-Step, Super Seven, or Premier Mortgage, gives homeowners the predictability of a fixed rate and adjustable rate mortgage for a certain time, most often seven or 10 years, and then the interest rate is adjusted to fit market conditions at that time. The main advantage associated with this type of loan is that homebuyers often get a slightly lower than market rate to begin with. The main disadvantage is that they may see their interest rate go up by as much as six percentage points at the end of the seven-year period. The lender may also reserve the option to call the loan due with 30 days notice at that time, making this loan similar to a balloon mortgage in some cases. Lenders offer this type of loan in part because research indicates that many homebuyers remain in the home for seven to 10 years before moving. For this type of homebuyer, the Two-Step or Super Seven loan present an excellent way of getting a fixed rate loan at a better than market price for a fixed period of time. Another type of mortgage that is becoming popular is called a Lender Buydown, where the homebuyer gets an initially discounted rate and gradually increases to an agreed-upon fixed rate over a matter of three years. For example: When the market rate is 10 percent, the fixed rate for the mortgage is set at about 10.5 percent, but the homebuyer makes monthly payments based on a first year rate of 8.5 percent. The second year the rate goes up to 9.5 percent, and for the third year through the remaining life of the loan, the rate is calculated at 10.5 percent. A second type of lender buy-down, called a Compressed Buydown, works the same way, but with the interest rate changing every six months instead of on a yearly basis. The Lender Buydown gives consumers the advantage of lower initial monthly payments for the first two years of the loan when extra money may be needed for furnishings and, secondly, the advantage of knowing that, although the interest rate does change during the first three years of the loan, the interest is fixed from the third year on. Click here to learn more about mortgage rates in your state: Mortgage Rates |
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