Understanding Fixed-Rate Mortgages

Fixed-rate mortgages have a set interest rate for the term of the loan

A fixed-rate mortgage charges a set rate of interest that remains the same through the term of the loan. The amount of principal and interest paid each month varies from payment to payment, but the total payment remains the same, making budgeting easy for homeowners. Payments made in the initial years of this kind of mortgage consist primarily of interest payments.

In a fixed-rate loan, the borrower is protected from sudden, potentially significant increases in monthly payments if interest rates rise. Additionally, fixed-rate mortgages are easily understood and there is little variance from lender to lender.

But it can be difficult to qualify for a loan when interest rates are high because the payments are less affordable.

While the rate of interest is fixed, the total amount of interest depends on the term of the mortgage. Traditional lending institutions offer a variety of terms. The most common are 30, 20, and 15 years.

30-year fixed mortgages offer the lowest monthly payment

A 30-year mortgage tends to be the most popular because it offers the lowest monthly payment. But the trade-off for that low payment is a significantly higher overall cost because the extra time in the term is devoted primarily to paying interest. Monthly payments for shorter-term mortgages are higher, allowing for the principal to be repaid in a shorter amount of time. Shorter-term mortgages also offer a lower interest rate, which allows for a larger amount to be paid towards the principal with each mortgage payment. Thus, shorter-term mortgages cost less overall.

When choosing a mortgage, you should consider your personal circumstances and balance them with the ever-changing realities of the economy.

A fixed-rate mortgage might be the best for you if interest rates are climbing or if you are looking for a steady and predictable payment.

Resnik Hayes Moradi LLP