how to understand fixed rate mortgages

Fixed rate conventional mortgages are the easiest mortgage loan for home buyers to grasp since the monthly mortgage payment and interest rate amounts will never change. Note your total monthly payment may change if the escrow payment goes up or down depending on the change of your tax and insurance assessment. The fixed rate mortgage is ideal for home buyers who are on fixed incomes or who do not like to see adjustments made to their mortgage payment.
Benefits of a Fixed Rate Mortgage

Many homeowners like the advantages a fixedrate mortgage provides:

Rate of interest and monthly payment amounts are fixed for this life of the loan
Homeowners can budget how much they deserve to put aside for the mortgage payment
Homeowners like the steadiness of a fixedrate mortgage
Homeowners can easily understand how a fixed-rate mortgage works

15 Year vs. 30 Year Fixed Rate Mortgage

You may choose the common 30 year fixed rate mortgage or you may repay your home loan faster with a 15-year fixed rate mortgage. The 30-year mortgage term has lower monthly payments, but your APR will be slightly higher.

The 15-year fixed rate mortgage term can have a slightly higher monthly payment, but you'll usually pay a lower APR. The APR with a 15-year mortgage is about 0.05 to 1.0 percent below the standard 30-year mortgage.

You will also pay your loan off quicker having a 15 year fixed mortgage, saving many hundreds of dollars in total interest charges.

Review this cost comparison for the mortgage loan of $100,000:

15-Year 30-Year
Interest Rate (APR) 7.50 % 8.00%
Monthly Payment $927.01 $733.76
Number of Payments 180 360
Total Money Spent $166,862 $246,149
Total Interest Paid $66,862 $164,149
The 15 year mortgage is well-liked among young home buyers who've sufficient income to pay off their mortgage before their children start college. Their home equity builds up quickly inside a shorter period giving them additional financing options for buying a car, paying for college, saving for retirement, etc.

Other Repayment Options

Some mortgage lenders may offer other repayment terms besides the conventional 15 year and 30-year term. Additional terms may include 10-year, 20-year, 25-year, and in some cases, 40 year terms.

A common rule to remember may be the longer the term, the higher the interest rate and the greater amount of interest you'll pay over time.

Prepayment Options

If you like the choice of paying off your mortgage sooner having a 15-year term but currently don't have the finances to pay the higher monthly payment, consider pre-paying your mortgage a little each month.

As an example, if you start with a fixed rate 30 year term, you may be required to pay for a minimum amount monthly based on a 30 year amortization schedule.

You are able to pay slightly extra every month by sending in an amount which is over the minimum amount required. You can pay as little as $1 over the minimum requirement to as much as you want up to your available mortgage balance in your loan. Note that the minimum payment amount will remain the same monthly no matter the amount you prepay.

Paying a further amount each month will reduce your mortgage balance over time where you are able to pay it off anywhere from 1 to 30 years depending on the quantity you prepay over time.

This "pay a bit additional" option permits you to budget your finances so that you can prepay when circumstances allow.

This feature is for homeowners who possess the discipline and budget to prepay a little bit extra each month so as to take full benefit of the reduced cost.

One approach to discipline yourself is by establishing a reoccurring online payment schedule through your financial institution. You may also use an outside bill paying service to produce your payments. But there's a cost to such services.

Be aware that some mortgage lenders penalize on prepayment. If a lender offers you a mortgage product that includes a prepayment penalty, negotiate the terms to get that prepayment clause removed.

Also notify your lender that any extra cash over the minimum payment is for reducing the mortgage principal, and is not to be used for paying non-accrued mortgage interest.

Accelerated (Bimonthly) Payments:

Many lenders offer the accelerated repayment schedule - this allows you to pay half your monthly mortgage payment every 2 weeks.

Here is an example, say your monthly mortgage payment equals $1000. Under the accelerated payment schedule, you might pay $500 every two weeks. These payments will equal to 26 bimonthly repayments, or equivalent to 13 per month repayments.

Under this plan you are able to repay your 30 year loan in about 23 years, saving you in total interest charges.

Another approach to reduce your loan in the same way is to prepay an extra 1/12th of the monthly mortgage payment each month.

You'll then pay $1,083.33 monthly, that will reduce your pay-off time in about 23 years.

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