Posted onMay 03/2019
The world of mortgages is complex when you are new to it. And, remember, there are no stupid questions! You might have heard the names of different types of mortgages, but were not sure what they were. Let’s start with the fixed rate mortgage. In this post, we are going to explain what it is and if it might be right for you. Always keep in mind, though, that you should talk to an independent mortgage broker before making any final decisions.
A fixed rate mortgage is one that has the same (fixed) interest rate for the full-time term of the mortgage loan. It is one of the most popular types of mortgages because of the certainty it brings—your monthly mortgage payments will be the same for the length of the loan. Other types of mortgages include variable or adjustable rate mortgage loans.
A Fixed Rate Mortgage in Detail
A fixed rate mortgage is offered as an amortized loan. An amortized loan is a loan with scheduled periodic payments of both principal and interest, initially paying more interest than principal. Non-amortizing loans can also be issued with a fixed rate. Even though these loans are popular, there are risks for both borrowers and lenders. These risks center on the interest rate environment. When rates are rising, a fixed rate mortgage offers lower risk for a borrower, but a greater risk for a lender. When interest rates are rising, a borrower will usually want to secure lower rates of interest and lock them in so that they can save on interest rate expenses in the months and years ahead. When rates are rising, the risk is higher for banks or lenders because they are losing out on any future profits by issuing a fixed rate mortgage loan. In other words, a variable rate mortgage could earn higher interest over time.
The Amortized Fixed Rate Mortgage Loan in More Detail
Amortized fixed rate mortgage loans are a popular mortgage loan product from banks. It has a fixed rate of interest over the full length of the loan and regular installment payments. Because it can be fully created when the loan is issued, the amortization schedule is easy to calculate with fixed rate interest. The payment schedule is constant for the life of the loan, and the borrower pays principal and interest on the loan in every payment, with the interest usually being paid early on in the loan.
Comparison with an Adjustable Rate Mortgage
Compared to a fixed rate mortgage, an adjustable rate mortgage is a combination of aspects of the fixed rate mortgage and variable rate mortgage. It is usually offered as an amortized loan with installment payments over the life of the loan. It has a fixed rate interest in the first few years of the loan, followed by a variable rate interest later on. It creates a bit more risk for people who are borrowing, but more predictability for banks and lenders.
When you need to learn more about fixed rate mortgages and figure out if it’s the right product for you, contact Northwood Mortgage at 888 257 8130 for a no-fee consultation. Let a mortgage specialist help you today!