Fixed-Rate Home Loans
Looking for a home loan you can count on to carry you through the long term? A fixed rate mortgage may be the answer. Read on to learn all about this type of mortgage instrument or skip to the head of the line and touch base with a Home.Loans expert right now.
Fixed Rate Mortgage Basics
Fixed rate mortgages, sometimes called "FRMs", are fully amortized home loans that have an interest rate that remains constant throughout the entire length of the loan term. Fixed rate mortgages are a popular alternative to adjustable rate mortgages, which have interest rates that rise or fall throughout the loan term.
Lenders love fixed rate loans because they represent a lower risk of default since the borrower already knows exactly how much their base principal plus interest payment will be for the next 10,15, 20, or 30 years.
Unlike an adjustable rate mortgage (ARM), the rate on the loan is not based on an index. The rate is based on the risk profile of the borrower and the risk of the market rate going up. In the initial years the rate of an FRM would always be higher than the ARM for the same borrower. This is because with an FRM the lender will have to carry the risk of the market rates increasing, unlike the ARM which puts that risk on the borrower.
Fixed rate mortgages don’t hold a lot of surprises, so they are generally preferred by banks everywhere. Over time, the payment you’re making becomes smaller in relation to your income. This is in direct opposition to an adjustable rate mortgage, which allows the interest rate to change, thus causing the payment to change, often increasing and even exceeding the amount of your payment in relation to your income over time.
Popular Fixed Rate Mortgage Products
The true beauty of an FRM is the simplicity behind it. Even within government-based programs such as the Federal Housing Administration's home loan program, fixed rate mortgages are the most popular loan choice among veteran and first time home buyers alike. Borrowers interested in fixed rate mortgages simply have to decide how long of a loan term they are comfortable with. Of course, the rates that are available are dependent on the term length as well. Fixed rate mortgages are most commonly found in these four variations, differentiated by the length of the loan term:
Fixed-Rate Mortgage Calculator
If you’re thinking about taking out a fixed-rate home loan, and want to see what your monthly payments might look like, try our fixed-rate mortgage calculator. Tell us the loan amount and interest rate, and the length of the loan program, and you can see an estimation of what your payments will look like over time. While our calculator doesn’t factor in everything (like closing costs and certain fees), it does factor in annual homeowner’s insurance, monthly HOA dues, and real estate taxes-- making it smart, efficient way to see if a fixed-rate home loan can help you get the home you’ve always wanted.
Plus, the fixed-rate mortgage calculator doesn’t just apply to first mortgages; if you’re thinking about refinancing your current fixed-rate or adjustable-rate mortgage into a new, fixed-rate loan, our calculator is also a great place to start!
Our Fixed Rate Mortgage calculator can help you to determine your estimated monthly payments, divided into both principal and interest. If you’ve done your homework, the calculator can also help you estimate monthly expenses like as homeowners association dues, homeowners insurance, and even property taxes!
Helpful Fixed-Rate Mortgage Calculator Terms
Amortization: A method for paying off debt in payments consisting of principal and interest, amortization usually involves a fixed-repayment schedule approved by both the lender and the borrower. Over time, the amount of each payment that goes to paying interest decreases, while the portion of the payment that goes to paying the principal increases.
Loan to Value (LTV): LTV is a simple way that a lender can assess the risk of giving you a home loan. To determine your LTV, you can take your potential loan amount and divide it by the home’s appraised value.
Loan Term: This is the time period, or life of the the loan, after which your loan usually needs to be completely repaid or financed into a new mortgage.
Principal: This is the size of your loan, minus interest. In most cases, mortgage payments consist of both principal and interest payments (in addition to property taxes, fees, and other charges). As you pay off your principal over time, it will continue to shrink until your loan is completely paid off.
Interest: This is a percentage of the principal that you pay to your lender. Fixed-rate loans have a fixed interest rate (duh!), which doesn’t change throughout the entire life of the loan. In comparison, interest rates on adjustable-rate loans do change throughout the loan’s life.
Annual Percentage Rate (APR): While your interest rate shows the percent of your loan’s principal you’ll have to pay to your lender, it doesn’t show everything. In contrast, APR is a more broad-based calculation of the expenses of taking out a loan-- since it includes both interest, and other costs, like points and broker fees.
Down Payment: This is the upfront cash payment you’ll need to make in order to purchase a home.
What Are the Benefits of a Fixed-Rate Mortgage?
Like any sort of mortgage, there are benefits and drawbacks to selecting a fixed rate mortgage for your home purchase. Let’s examine the most pressing.
Pros and Cons of Fixed-Rate Mortgages
|Locked-in rate. You never have to worry that your interest rate is going to change on you, it’s always the same as it was when you signed your mortgage documents at closing.||Higher initial payment. Fixed rate mortgages often have a much higher initial payment than their adjustable counterparts. This can be a problem if you have a debt to income ratio that’s out of whack or have other reasons to need a small payment now, but can refinance later.|
|Stable P+I payment. Although your taxes and insurance may change, causing your overall payment to change a little bit (if those items are escrowed), the basic principal and interest portion of your payment will always remain the same.||More costly overall for short term. If you’re only planning to stay a few years in the home you’re buying, fixed rate mortgages can be very expensive. Adjustable rate mortgages often have very low introductory rates that may be good for three to seven years|
|Often lower long-term rate. Adjustable rate mortgages can offer some pretty impressive introductory rates, but over time, they tend to have very high interest rates. Long term, fixed rate mortgages are usually your best bet.||Refinance required to change rate. Unlike an adjustable rate mortgage, which can have a fairly free-floating interest rate once the flex period has started, if you want to change the rate of your fixed rate mortgage a streamline or traditional refinance is required.|
Who’s the Ideal Borrower for a Fixed-Rate Mortgage?
There are several different types of borrowers who will find the fixed rate mortgage to be an ideal fit. That’s why it’s such a universal mortgage product in the industry. In general, buyers who use a fixed rate mortgage:
Are not anticipating a significant income change.
Do not plan to have any changes in their family size.
Budget carefully, so they like knowing how much their payment will be.
Intend to stay in their homes for an extended period.
However, there’s also second subset of buyers who like to use fixed rate mortgages: first time home buyers. These brave explorers are just starting their home buying journey and are often approaching the buying experience with some level of trepidation. Using a fixed rate mortgage can help calm some fears and make buying a way to enhance their financial security, rather than a gamble on future mortgage rates.
Financially savvy borrowers also use FRMs to lock-in interest rates during periods of low market rates. When the market rates rise, the borrowers rate will stay fixed. Over the years this could lead to massive savings.
Fixed-Rate Mortgages: In Review
When interest rates are low, fixed rate mortgages are excellent choices for most buyers, no matter who they happen to be. They represent safety and security, since very little changes over the course of the loan. However, if you’re only looking for a short term solution or are anticipating a large change in your financial situation that would allow you to make a bigger payment than you can make right now, they may not be the best answer.
Your particular financial situation will dictate whether or not a fixed rate mortgage makes sense for your family. If you need help working out all the variables, let a Home.Loans expert help! We’re in the field every day and -- better yet -- our advice is free.