Fixed Rate Mortgage Loans - Understanding The Basics
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Understanding Fixed Rate Mortgage Loans
Fixed rate mortgages are the most popular choice for home buyers due to their stability and predictability. By offering consistent payments, these loans allow long-term homeowners to effectively budget and protect themselves against escalating interest rates. However, they may not suit everyone because of their typically higher interest rates and potential to reduce buying power.
Key Features of Fixed Rate Mortgages
Fixed rate mortgages provide stable interest rates, low-risk, and manageable long-term monthly payments. The interest rate is locked in during the loan application process and is influenced by the market. You can even secure a lower rate by paying points upfront, which makes sense if you plan on staying in your home for several years.
One of the main advantages is the predictability of monthly payments. Unlike other expenses that may rise with inflation, your mortgage payment remains unchanged. As your income grows, this expense becomes a smaller portion of your budget.
These mortgages are also low-risk, with no worries about increasing interest rates or looming balloon payments. You have the flexibility to repay your loan early, reducing the overall interest paid.
Mortgage Terms
Traditionally, fixed rate mortgages have terms of 30 or 15 years. However, lenders now offer additional options. The 30-year loans are the most popular due to their lower monthly payments, which allow borrowers to qualify for larger loans.
Other options include 15, 20, and 40-year mortgages. While 15 and 20-year loans offer lower interest rates, they come with higher monthly payments compared to a 30-year mortgage. These shorter terms can save significantly on interest, appealing to those wishing to pay off their loans before retirement or before their children attend college. Although less common, 40-year mortgages offer even lower monthly payments, albeit with higher total interest costs.
Biweekly mortgages require half your mortgage payment every two weeks, resulting in an extra payment each year, which can lead to paying off your mortgage in approximately 18 to 19 years. Most lenders offer the flexibility to switch back to a 30-year term without penalties.
Drawbacks of Fixed Rate Mortgages
Despite their benefits, fixed rate mortgages aren't for everyone. Alternative mortgage options might allow more borrowing power compared to fixed rates. If you plan to move within seven years, adjustable rate mortgages could be more cost-effective, as most homeowners move within this timeframe. Additionally, you might be locked into an interest rate that could potentially decrease in the future.
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