If you are in the process of purchasing a home or refinancing a loan, you will want to explore the fixed rate mortgage. Here is what you need to know about this type of loan and how to get one.
- Fixed Mortgage: What is it? A fixed mortgage rate is a loan with a single interest rate that does not fluctuate over the life of the loan.
- Pros. Fixed mortgages present the borrower with a predictable cost schedule for the duration of the loan. The payments consist of primarily tax-deductible interest, which is another benefit. These loans are not subject to the unpredictable forces in the world of finance and lending. Adjustable rate loans, on the other hand, can fluctuate and are directly influenced by market values and trends; if rates go up during the life of your loan, you will experience an increase in monthly interest payments with the ARM. Fixed rates are simple to understand and this is one reason first-time buyers end up choosing a fixed mortgage.
- Cons. Though predictable, fixed term mortgages tend to have a higher interest rate than adjustable loans. If interest rates decrease for the duration of your loan, you do not reap any benefits; your loan remains the same. You may refinance, but that can cost you from several hundred to a few thousand dollars, plus the hassle of the time and paperwork.
- 30-yr fixed mortgage. This loan has the lowest monthly payments of all fixed rate loans, but this long-term rate will incur more interest, for life, than all others.
- 15-yr fixed mortgage. With this mortgage, the borrower positions himself to own his house free and clear in one-half the time and for less than half the total interest of the 30-yr fixed loan. Payments are higher (typically 10 to 15 percent higher) than the amounts for a 30-yr fixed. This mortgage can be a good match for families wanting to get rid of their house debt before having to deal with college tuitions for their kids. With this loan, you will pay higher monthly payments but you will own your home more quickly. You have to decide what your priorities are before you opt for this loan.
- Biweekly mortgages. This fixed rate loan has a much smaller amount of interest attached to it than the conventional 30-yr or the 15-yr fixed. In this model, you pay twice a month, thus cutting down your interest and putting more toward the principle. This loan works if you have steady cash flow and can commit to twice-a-month payments. Payments are deducted automatically from your bank account. People who find this loan attractive are those that have the cash resources and who want to pay off the loan rapidly.
- "Convertible" mortgage. It is possible to start with a bi-weekly mortgage and convert to a fixed 30-yr. Ask your lender about your conversion options before you make a decision on your loan. If you can change the format of the loan and payment structure, this is termed a "convertible mortgage." If you are disciplined and think you can do payments on your own without signing up for the bi-weekly, this may be a better option since you will not be confined to the terms of the bi-weekly payment plan.
- How to get a rate. Shop around at different lenders and explore their rates. Inquire about their 30-year as well as their 15-year and biweekly plans. Approach several mortgage brokers and reach a comfortable rate. Make sure you are comfortable with your lender, as she will have a crucial role in how smooth (and how affordable) your new purchase will be.
- Fill out, lock and sign. The lender will require you to fill out a series of papers with relevant information. You will be asked to sign to ensure all that you have claimed is true. The loan, once locked in, will go into underwriting and will be processed. Once you are "locked in," your lender will set you up with information regarding your mortgage. If you are closing on a home, your payments will start after the closing. If you are refinancing, they will occur as it is defined in the loan. Ask your broker about the specifics of the loan, the monthly amount due, late fees, and if there are prepayment penalties.
Now all you have to do is write the monthly (or bi-weekly) check and pay on time to avoid any associated fees. Good luck!