What Is A Fixed Rate Mortgage?
You may be wondering, what is a fixed rate mortgage? Fixed rate mortgages are the most popular types of mortgages used by consumers today. They are normally considered less risky than their adjustable rate mortgage counterparts. Because of the properties of a fixed rate mortgage, it is easier to plan and budget for mortgage payments throughout the life of the loan, and it is always known what the principal and interest portion of the loan payment will be.
Fixed rate mortgages are loans in which the rate of interest paid toward the lending institution never changes. In adjustable rate mortgages, monthly mortgage payments can change when an interest rate changes based on market or interest rate differences from one period to another. This could introduce a sharp difference in monthly payments when this happens. For fixed rate mortgages, once the monthly payment is determined at the creation of the loan, the payment never changes.
The only variable which could change a monthly payment for a fixed rate mortgage is if there is an escrow account for taxes and insurance. As payments are made throughout the term of a fixed rate mortgage, interest receives most of the balance of the payments in the first half of the term. As the loan goes into the second half, more of each monthly payment is applied toward principal instead of interest. This is known as loan amortization.
Fixed rate mortgages commonly come in loan terms of ten, fifteen and 30 years. Because of the predictability of fixed rate mortgages, they are usually offered at higher interest rates than adjustable rate mortgages. The only way possible to change the interest rate of a fixed rate mortgage is to refinance the loan, which results in negating the terms of the loan completely.