Fixed-rate mortgages remain one of the most popular mortgage products in America. According to Freddie Mac, 30-year fixed-rate mortgages account for 90 percent of the home-purchase loan market, while an additional 6 percent chose 15-year fixed-rate loans. The final 4 percent of homebuyers chose adjustable-rate mortgages and loans with other terms.
So, what is a fixed-rate mortgage? As you might have guessed by the name, a fixed-rate mortgage has an interest rate that never changes throughout the duration of the loan, which is typically 15 or 30 years depending on the loan term you choose. With a fixed-loan rate, homebuyers do not have to worry about their interest rate rising over time period, which would result in higher monthly payments.
Amortizing vs. Non-Amortizing
Fixed-rate mortgages can either be amortizing or non-amortizing. Amortization is a term used to describe the process of erasing debt. While all mortgages need to be repaid, not all home loans necessarily amortize.
Amortized fixed-rate loans are among the most common offered by lenders. This type of loan has a fixed-rate of interest that extends over the life of the loan, as well as consistent installment payments. When you apply for an amortizing home loan, your lender will generate a basis amortization schedule consisting of constant payments.
Non-amortizing fixed-rate loans are often referred to as interest-only loans or balloon-payment loans. Unlike an amortized loan, lenders have more flexibility when generating scheduled payments. This type of loan typically charges a monthly interest that is based on a flat rate. The borrower only makes monthly payments of interest with no payment to the principal until a specified date.
Avoiding Spiked Interest Rates
With a fixed-rate mortgage, the homeowner is charged a set interest rate that does not change from month to month. While the principal and the interest paid each month can vary based on a number of factors, the total payment always remains the same. This can make it easy for homeowners to establish a budget.
One of the biggest advantages of a fixed-rate mortgage is that the borrower is protected from sudden and sometimes substantial increases in their monthly mortgage payment, which can occur due to fluctuations in interest rates. While the interest rate on the loan may be fixed, the total amount of interest you will pay primarily depends on the term of the loan. Most traditional lenders offer 15, 20, and 30-year fixed-rate mortgages.
Stable Monthly Payments
When you first buy a home, you are likely to run into a number of unexpected expenses. From sudden plumbing repairs to new kitchen appliances, these additional costs can wreak havoc on your budget. Having a fixed-rate mortgage can help ensure that you are able to continue paying down your home loan without fear that your next payment will be more than you can realistically afford.
While fixed-rate mortgages tend to have a higher interest rate than adjustable-rate mortgages, homeowners can enjoy stable payments that do not fluctuate from month to month. This predictability can be highly valuable for homeowners who are on a strict budget and want to know how much they will be spending on housing each month.
Is Fixed-Rate Right for You?
Not sure if you are a good candidate for a fixed-rate mortgage? Fixed-rate home loans are an excellent choice for most people, especially homeowners who plan on being in their home for at least five years or if interest rates are very low at the time you apply.
An adjustable-rate mortgage may make more sense for you if you only plan on living in the home for a few short years before selling. However, before making your decision, take the time to calculate how much your mortgage payment may change and if you will be able to afford a higher payment if your interest rate does go up over time.
You will also want to be aware of other factors before choosing a fixed-rate mortgage. There are many elements that go into pinpointing an interest rate for a mortgage, such as the loan size, your location, credit score, the term of the loan, the type of mortgage, and the amount of the down payment.
Learn More by Calling Mathis Today
With interest rates at an all-time low, there is no better time than the present to purchase a home using a fixed-rate mortgage. If you need help getting started, reach out to the experts at Mathis Title Company. This Fairfax title company has extensive legal experience and has successfully assisted countless lenders, realtors, sellers, and buyers. Call Mathis Title Company today to schedule an appointment.