Mortgage Consultants Group

Fixed Rate Mortgage

This loan gets its name from the fact that the interest rate is locked in at the time of the loan. The payments are set (the same amount each month) at an amount that will amortize (pay down) the loan. Where some other loan types have an "interest only" payment, the payment for a fixed rate mortgage is calculated at an amount that will pay the loan off at the end of its term. Over the life of the loan, as you pay down the balance, more and more of your payment goes toward the principal, and less goes toward interest. But the payment doesn't vary. The interest rate is generally higher than other types of loans because the lender is taking the risk that the economy could change.

Other types of loans have an adjustable interest rate (Adjustable Rate Mortgages ARM) that changes in some way during the life of the loan. As a result, they payments can fluctuate, too. Some loans, such as a hybrid loan, have some combination of the fixed and adjustable loan characteristics.

A fixed rate mortgage generally has a higher interest rate than an adjustable rate mortgage, but the rate stays the same throughout the life of the loan. As a result, your payments are also fixed. This can be reassuring because it adds financial stability to your life in several ways:

  • You know exactly where you stand-the loan is straightforward
  • Your loan is paid down consistently-the equity grows at a steady rate with each payment
  • You can budget easier because your payment does not fluctuate
  • The ups and downs of the economy do not affect your interest and payment

Fixed Rate Mortgages are most commonly set up as 15 or 30 year loans. The shorter the term, the higher your payment will be. This has trade-offs. For a shorter term loan, you must pay more each month, but your equity builds quicker, and overall, you pay less interest. A longer term loan often gives you a lower payment that is easier to handle. Some fixed rate mortgages allow you to pay off early without a penalty; some do not. This should be addressed at the time of the loan set up. If prepayment, or early payment, is allowed, you can always pay a loan off quicker if your current financial situation improves.

Loan amounts may vary according to:

  • the value of the house
  • how much (what percentage) the lender will loan
  • your credit

The bottom line is that your particular situation, along with the type of loan that you choose, affects the size of payment that you will make. A Fixed Rate Mortgage simply sets the conditions of the loan so that they do not fluctuate over the life of the loan.

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