Fixed Rate Mortgages
A mortgage is a loan secured by real estate. Most homeowners take out a mortgage on their home. These loans can have either fixed or variable rates.
A fixed rate mortgage is one where the rate charged on the loan doesn’t change for the life of the loan. If you take out a 30-year, fixed rate mortgage the amount of your monthly payment stays the same for the entire 30 years. That doesn’t mean that your housing costs won’t change. Often property taxes and home owners insurance are part of your monthly payment. Those amounts can change over time.
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With a fixed rate mortgage, the percentage of your payment that goes toward paying down the loan amount changes over time. For example, if you took out a 30 year at 7% interest on $165,000, your monthly payment would be 1,097.75. Out of that monthly payment only 135.25 would go toward paying down the loan amount. The interest you pay on that first payment would be 962.50.
With a fixed rate mortgage, the principal isn’t paid down quickly in the first few years. It’s only after paying on the loan for many years that the principal decreases significantly.
Since interest rates are at historic lows. This might be a good time to look at fixed rate loans. Chances are that interest rates will increase in the future. Locking in a low rate for a long term can be a way to create some financial stability.
Shopping for a fixed rate mortgage is less complicated than looking at variable rates but there are still variations among lenders. When evaluating a loan offer, you need to compare the annual percentage rate (APR) and also look at other charges.
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Lenders sometimes have very low APR’s but then they tack on origination fees, points or other financial charges. These charges can be added to the loan amount and increase your total monthly payment. Ask to see a breakdown of all the closing charges before you sign on the loan.
Fixed rate loans are less risky for you as a borrower and banks charge slightly higher rates for these types of loans. Variable rate loans have lower initial rates but that rate won’t be fixed for the life of the loan. If interest rates skyrocket, a fixed rate loan will remain stable but a variable rate loan will keep increasing.
Take some time to evaluate all your options before you decide on a mortgage. It’s a big investment and you’ll have to live with it for a long time.
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