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Advantages of Fixed Rate Mortgage Loans

Should you choose a fixed rate mortgage or an adjustable rate mortgage? While adjustable rate mortgage can be tempting because they are often lower, fixed rate mortgage can offer some great advantages as well. This is precisely why they have remained a mainstay of most home buyers for many years. While interest rates can and do fluctuate, a fixed rate mortgage provides the distinct advantage of security.

If you are a first time home buyer you may not be familiar with the many different types of mortgage loans. A fixed rate mortgage loan allows the mortgage loan to be repaid in equal monthly payments over a period of time. That period of time can vary, but is usually somewhere between 10 to 40 years. The most common amortization period for a fixed rate loan is 30 years.

In understanding fixed rate mortgages you should know that payments will first be credited to interest and then to principal for the loan. During the first years of the loan, the majority of the monthly payment will go toward interest on the loan. As the end of the loan period draws near, the majority of the monthly payments will go toward principal.

Many borrowers are attracted to the idea of a fixed rate mortgage over an adjustable rate loan because the security of such a loan appeals to them. The great benefit of a fixed rate mortgage is that homeowners know they will pay the same amount for their mortgage loan each month. Even if interest rates do go up, a homeowner with a fixed rate loan will not be affected. Of course, the reverse is also true. If interest rates should decrease, the payment will remain the same and the homeowner will not be able to take advantage of that decrease unless they elect to refinance their mortgage loan.

Borrowers have the option to make larger monthly payments and have the additional funds be directed toward the principal on the loan. This makes it possible for the loan principal to be decreased at a faster rate and the loan to be paid off faster, saving money in interest over the life of the loan. For example, if you chose to pay half of the mortgage payment every two weeks you could pay off a standard 30 year fixed rate mortgage in 22 years, shaving off 8 years from the loan. Even one additional payment per year could reduce the amortization period to 26 years, shaving off four years from the loan.

Of course, you are not required to make additional payments if you do not wish to do so or cannot afford to do so. Just keep in mind that you will be paying the full brunt of the interest.

Many borrowers wonder whether they should pay for points in order to buy down the mortgage during the first few years. This can be accomplished by paying a lump sum. In most circumstances it really does not make sense for buyers to do this when they can just as easily save the same amount of money in a savings account and earn interest on it which they can use to assist in paying the mortgage payment.

Points will help to decrease the interest rate. Each point is the equivalent of 1% of the loan. In order to recover the full cost of those points you would need to calculate the monthly savings you would get as a result of the lower interest rate and then compare it to the rate without the points. Take that number and then divide it into the points in order to determine the number of months that would be required for you to break even.

Keep in mind that if your loan is higher than 80% of the home's purchase price, you will typically be required to pay homeowner's insurance and monthly taxes to the lender. In addition, you will also like be required to pay private mortgage insurance as well in order to decrease the amount of risk the lender is taking on by providing you with a larger loan. Once the loan value drops to below 80% of the home's value, you can typically request that the private mortgage insurance requirements be dropped.

Finally, keep in mind that you should always review home loans carefully in order to determine whether a prepayment penalty will apply. Under this type of penalty, in the event you pay off the loan early you may be required to pay additional interest.



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