If you are new to mortgages or just don’t remember going through the process the last time you financed a home purchase, this article will explain some important features of the loan known as the fixed rate loan or fixed rate mortgage. These are pretty easy to come by and the product that is the most familiar to people purchasing or refinancing homes. A purchase of a home is most likely the largest outlay of funds you’ll experience during your life, so understanding the fixed-rate mortgage is important knowledge to have.
These fixed-rate mortgages are the most common type of mortgage product. They are not the only type of product, of course, as they are very prevalent. When people speak about getting a home loan, they are usually referring to this type of loan. The fixed-rate mortgage product is the one that is probably advertised the most, the advertising you’ll hear on the radio or see on TV or other media is typically providing information about their lowest fixed-rate product.
The Fixed-rate mortgages have a specific period with them, such as a 30-year fixed-rate mortgage. There are also 20 years which are probably the second most common. Lenders have different programs that will work with what you are looking for. There are enough lenders out there that it would be uncommon to find a loan provider who couldn’t give you multiple options with your loan duration.
Fixed-rate mortgages have the same payment for each period. The benefit here is that you can base your monthly budget or even bi-weekly budget on the amount you’ll be paying each month towards your mortgage. Because the rate doesn’t change, neither does the monthly payment. This makes the fixed-rate mortgage very predictable.
With a fixed-rate mortgage, at the end of the term, your home will be paid off completely. Several mortgage products have a balloon payment at the end of the term which means you’ll have a larger lump sum, usually a multiple of 10 to 20 times your monthly, or in the event of some interest-only products, the principal would be due at the end of only a couple years into the mortgage product which would either require you to pay off the home completely or refinance the balance.
On a typical 30-year fixed rate mortgage, you’ll pay your monthly payment of which a percentage of that amount would go toward the principal and the other percentage goes towards interest. This is done on a sliding scale, so in the first years of the mortgage, you’ll be paying more in interest to the bank than paying down your loan. This is as designed by the banks that fund these mortgages. They expect that they get their interest paid to them before you’re “allowed” to use more of your regular monthly payment to go towards the principal. This is all done behind the scenes, but it is interesting to know that you won’t start paying more towards your principal than interest until year 22 of your mortgage. There isn’t anything to prevent you from paying down your mortgage early, however, and maybe a very good idea depending on your life situation.
Establishing your first fixed-rate mortgage or even refinancing for the 10th time shouldn’t be a complicated process. The key to getting this done is to find a loan provider you can trust who will work with you and educate you as needed so that you understand what you’re paying for. Because this is such a large dollar amount that you’ll typically be paying for a home, there are ways that you can get caught paying more than you should and even small percentage changes over the life of the loan may result in you paying thousands of dollars more in interest. There are a lot of mortgage calculators out there as well you can use to give you some rough estimates.
Thank you for reading, and I hope you have a good rest of the day!
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