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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