The Benefits and Popularity of Fixed Rate Mortgages

Sponsored Links

The Benefits and Popularity of Fixed Rate Mortgages

Let’s face it: Fixed rate mortgages are popular for a reason. I have a 30-year fixed rate mortgage, and chances are, if you’re reading this, you probably do too – or plan to have one soon.

They have been a common mainstay in the home mortgage loan industry for years, and although interest rates have fluctuated wildly over the same decades, the peace of mind that comes with having a secure fixed rate mortgage has made it an appealing option again and again.

First off, let’s define what the word “mortgage” means. The French origin of the term reveals that “mort” means dead and “gage”translates to pledge. There have been rumors that state if the person who borrowed the money didn’t pay back their debt, the property became dead to them because then the lender would take back the land.

Sponsored Links

A paid off debt equaled a dead pledge, so goes the common wisdom of the time, but we can’t be sure if that’s what the real deal was circa 1500. Let’s talk about what fixed rate mortgages mean today.

The Benefits and Popularity of Fixed Rate Mortgages

WHAT ACTUALLY IS A FIXED RATE MORTGAGE?

We might hear the “fixed rate mortgage” term often bandied about, but do you really know what it means? It’s a plan to repay a debt in equal monthly installments over an agreed-upon length of time.
That length of time can last anywhere from 10 years to 50 years, but a 30-year period – like my fixed rate mortgage on my home – is the most common.

With this type of mortgage, the payments made to repay the debt are first credited to the interest owed, and then credited to the principal balance.

At the beginning years of the fixed rate loan, a large portion of the monthly payment is attributed to interest, but at the end of the loan, much of the monthly payment is credited to principal.

The fixed rate option may sound outstanding – and for many home buyers it is – but it helps to understand that a $200,000 fixed rate mortgage loan taken over a period of 30 years at a 6% interest rate means that you will pay a whopping $231,676 in interest during the entire life of the loan.

THE BENEFITS OF GETTING A FIXED RATE MORTGAGE

The best part of having a fixed rate mortgage payment is being able to know your monthly payments aren’t going to change. For example, my mortgage loan for nearly $150,000 at an approximate interest rate of 6% dictates payments of $1,033 or so each month.

There’s comfort in knowing that the interest rate is a fixed – or locked in – amount, therefore if interest rates go up or down, it doesn’t have any affect upon folks who enjoy a fixed rate mortgage loan. The only times the monthly payments would change is if the borrower chooses to refinance their mortgage loan, and usually they go through that process in order to reduce their monthly payments to take advantage of lower interest rates.
Another advantage is that borrowers can choose to make larger monthly payments and have the extra monies paid toward the principal portion, which would decrease the principal loan balance faster.

If you pay half of your monthly mortgage payment amount every two weeks, you could pay off your mortgage in approximately 22 years. Even one additional payment each year would cut the amortization period down to around 26 years. But these extra payments aren’t required on fixed rate mortgage loans.

IS IT A GOOD IDEA TO PAY POINTS?

Some people may choose to “buy down” their mortgage in the initial years by paying their lender a lump sum, but it doesn’t make much sense to buy down your mortgage unless the seller or another party is paying the fee in your stead. That money could be saved instead, and used to grow interest, additional income that could help pay the mortgage.

Points help decrease your interest rate and each one equals 1% of your mortgage loan. It helps to determine your monthly savings with the lower interest rate as opposed to the rate without points in order to get back the cost of those points. Divide your points by that number to figure out the number of months it’ll take you to break even.

Let’s say you pay 2 points on a $200,000 loan in order to obtain an interest rate of 5% with a payment of $1,074.

On the other hand, you could garner that same $200,000 loan at a 6% interest rate with no points and pay $1,200 per month.

The difference between those two payments equals $126.

Sponsored Links

Two points – or 2% — would cost $4,000, because 2% of $200,000 equals $4,000. To get back your $4,000, divide $4,000 by $126 – which equals nearly 32 months. So by month #33, after nearly three years of paying off your mortgage, you’ll start profiting from paying the two points.

TAX AND INSURANCE COLLECTION

If you take out a loan that’s more than 80% of the purchase price of the new home you’re buying, you’ll probably have to pay monthly property taxes plus homeowners insurance to the lender.
Then the lender will pay both the insurance company and tax assessor. Therefore, the amount you pay for PITI, as it’s called, will vary from one year to the next.
Your lender will collect a reserve amount from you in advance – usually representing anywhere from 2 to 8 months’ worth of taxes. This reserve is sometimes called an escrow account, and it adds more to your closing costs. It also depends on factors like the time of year and the due date of your yearly tax bill.

People who put down 20% or more as a down payment might be charged “1/4 point to rate,” which means you’ll pay .25% more in interest simply to not have an impound account set up. For these reasons, some folks prefer pay their own taxes and insurance.

PENALTIES FOR PREPAYMENT

You’d think that paying off your debt early would be a good thing – and it is – however, some lenders tack on a prepayment penalty if you pay off your loan in perhaps one to five years. That’s when you might have to cough up six additional months of interest or more just to satisfy the debt.

Tag : fixed rate mortgage , adjustable rate mortgages , rates mortgage , 30 year fixed mortgage rates , fixed rate mortgage calculator , 30 year fixed mortgage rate

Sponsored Links

The Benefits and Popularity of Fixed Rate Mortgages
1 vote, 5.00 avg. rating (100% score)

Advertisement

No comments.

Leave a Reply