Fixed Mortgage Rates - Sure and Stable Payments
A fixed rate mortgage (FRM) offers you sure and stable monthly payments. Mortgage loans are long-term commitments. Although you can find loans from 4-40 years, the most normal types of loans are 30-year FRM and 15-year FRM.
In today’s mortgage market, with historically low interest rates in 2012, fewer borrowers are looking for adjustable rate mortgages (ARM). Although an adjustable mortgage rate comes with a lower interest rate in the introductory period, it carries the risk of a higher rate in the future. A fixed mortgage rate loan carries the same interest rate for the entire period of the loan, so you don’t have any surprises in your mortgage payment.
In order to understand which type of mortgage is best for you, learn about:
- Fixed mortgage rates – Comparing Payments
- Pro/Con of a fixed mortgage rate
- Shopping for a mortgage rate
Fixed Mortgage Rates – Comparing Payments
Your monthly payment is calculated based on the following factors:
- length of the loan
- type of interest rate
- type of payment plan.
The most common type of loan is the FRM, based on equal monthly payments. The principal and interest payments are divided in such a way that your monthly payment remains constant. You pay your monthly interest based on your interest rate and balance at the beginning of the month, and the principal amount is calculated by subtracting the interest part from your constant monthly payment.
Here is an example for a $200,000, 30-year FRM, at 3.5% interest and fixed monthly payment of $898.09:
|Payment # (month)||Interest Portion||Principal Portion|
Your interest portion represents a high portion of your payment. In the above example, your first payment is 65% interest and 35% principal. After 15 years, it becomes 41% interest and 59% principal.
The ratio will change based on your interest rate and the length of your loan. The table below shows the monthly payment, and initial distribution for the first payment, for a $250,000 FRM based on different loan periods and interest rates:
|Length years||Interest Rate||Monthly Payment||Interest||Principal||Interest portion of Payments|
The longer the term or the less the interest rate, the less interest you will pay.
Pro/Con of a fixed mortgage rate
Interest rates fluctuate, and have declined over the last several years, reaching new historical lows in June 2012. 30-year fixed rate mortgage hit 3.5%, and 15-year mortgage rates are under 3.0%. (Check with your lender the fees and points on your loan). This makes taking a fixed rate loan very attractive and many borrowers, especially for refinance loans, are considering 15-year fixed loans.
The main advantage of a fixed rate mortgage is the stable payment. You can budget your payments without any surprises. From the beginning of the loan to the end, you know your monthly payment and the amount you will owe in the future.
The main disadvantage of a fixed mortgage rate is that it is higher than the initial rate for an ARM. You can take a 30 year, 7/1 ARM, where your interest rate is locked for the first 7 years. That means that you are paying less interest, and for the same monthly payment, paying your loan off quicker. However, at the end of the 7 years, your interest rate is going to fluctuate, so make sure that you can afford the adjusted payments. For more information….
In a low interest market, the interest rate differential is small, so most borrowers prefer the fixed mortgage rate. When rates are higher, the adjustable rate mortgage is more popular, as borrowers hope to refinance into a lower rate fixed mortgage in the future. However, you carry the risk you will not qualify for a refinance due to a drop in your house value, income or credit score. Therefore, always weigh your options and make sure that you can afford all the scheduled payments.
getting a fixed mortgage rate loan
in order to get a good fixed mortgage rate take the following steps:
1. prepare your budget:
keep and maintain your budget so that you know how much you earn and how much you spend. in order to get a mortgage loan you will need dti ratios under 29% for you housing expenses (principal, interest, mortgage insurance, homeowner insurance, and property taxes). your overall dti shouldn’t be above 36% for a conventional loan and 43% for a fha loan.
2. learn about mortgage rates.:
check out the mortgage rate table below to see today’s mortgage rates.
3. shop around!
mortgage rates, including fixed mortgage rates fluctuate from lender to lender. it pays to shop around. get a mortgage quote from a bills.com mortgage provider.