Also known as a vanilla wafer mortgage, this type of mortgage loan is an amortizing mortgage loan that features a static interest rate that is unchanging throughout the loan term. This type of mortgage loan differs from adjustable rate mortgage loans, where interest rates change according to fluctuations in bank interest rates.
The benefit of a fixed rate mortgage is that the home owner knows exactly how much the mortgage note will cost each month, rather than being subject to adjustments due to changing interest rates. Many home owners prefer the security of these fully-amortizing mortgage loans, as they allow them to budget precisely.
Other examples of mortgage loans are interest only mortgages, graduated payment mortgages, variable rate mortgages (adjustable rate mortgages fall in this category) and balloon payment mortgages. The fixed rate mortgage stands alone due to its unchanging nature.
Pros and Cons
As with all types of mortgages, there are pros and cons to choosing fixed rate mortgages. The key pro of a fixed rate mortgage is the stability of its fixed rate payment system, which makes it simpler to create a budget and stick to it. The primary con of this type of mortgage is that you may end up locked into a higher interest rate, even if interest rates decline. In other words, you may end up paying more than others who enjoy lower payments on adjustable rate mortgages (when interest rates fall).
These types of mortgages feature a principal loan amount, an interest rate, a compounding frequency and a set time frame. All of these factors are used to calculate monthly repayment amounts. These types of mortgages are not linked with an index. Instead, the interest rate is decided in advance. Each mortgage of this type will feature a set monthly payment that makes it possible for the borrower to clear away all outstanding principal and interest charges before the end of the loan term.
For most home owners, this type of mortgage will be easier to handle than other sorts of mortgages, such as balloon payment mortgages. Since balloon payment mortgages require huge payments at the end of the loan term, they are often too much for home owners to handle, and foreclosures may result from defaults on big balloon payments.
This is why the United States Federal Housing Administration (FHA) has developed and overseen the modern, fixed-rate mortgage as another option for home owners. The FHA insures fixed rate mortgages in order to support the selection of these types of sensible mortgages.
Common Amortization Periods
These types of mortgages are the most traditional form of loans for Americans. Typical amortization periods for fixed-rate mortgages are 15 years or 30 years. These days, amortization periods may be even longer (such as 40 or 50 years), in order to help Americans handle the cost of expensive real estate purchases. In other countries, typical amortization periods for fixed-rate mortgages may be shorter. For example, in Canada, 5 or 10-year mortgages of this type are not uncommon.
An amortization period is the time period that it takes to repay a mortgage, including the principal loan amount and interest owing on the loan. Lenders charge interest on mortgage loans. The longer an amortization period is, the more interest the borrower will pay. As the principal gets smaller, the interest charged on the loan will decrease.
When you do select a fixed-rate mortgage, rather than an adjustable rate or balloon-type mortgage, you’ll enjoy knowing exactly how much you need to pay each month. In addition, you’ll be able to rest assured that your current repayment structure is in place for quite a long time, depending on your chosen amortization period.
This type of loan offers lots of benefits to home owners, and it may be the safest choice for first-time home buyers. Since home ownership comes with plenty of financial pressures, knowing exactly what you will need to pay each month may assist you in doing financial planning that ensures that you are able to keep your home and also handle all of your regular expenses.