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Fixed rate mortgage: A safe mortgage choice for you

Posted on: 09th Mar, 2004 02:51 am
if you'd like to go for a mortgage where the interest rates and payments don't change over the loan term then you should take out a fixed rate mortgage (frm). a fixed rate loan also helps you maintain a steady budget. take a look at these topics before you choose a frm:
do it yourself!
get frm amortization schedule

what are the features of fixed rate mortgages?

the features of a fixed rate mortgage are:
  1. loan term: the loan term usually varies from 15 to 30 years.
  2. rates: the interest rates are usually higher than the initial low interest rate on an arm, which means your initial payments will be higher. interest rates on fixed rate loans are based on the yield from a 10 year treasury bond.
  3. monthly payments: the monthly payments on a fixed rate only vary according to changes in property taxes and homeowners insurance premiums.
    as the loan principal is repaid, the amount you will be paying toward interest will decrease. however, the interest rate that is being used to calculate the interest payments will remain the same.

who should opt for a fixed rate mortgage?

the fixed rate mortgages are suitable for:
  1. first time buyers, as it offers more security against rising rates and payments.
  2. those who plan on staying in their home for a long time.
  3. borrowers who'd like to know what their monthly expenses are going to be.
  4. those who can afford to pay the higher interest rate.

how do you get the best fixed rate mortgage?

in order to get the best or cheapest fixed rate mortgage, you should request mortgage quotes from different lenders. this will help you compare offers including apr, interest rates, closing costs, lender fees, etc so you can choose the best mortgage. if your financial situation is good enough, you may request to have some of these fees waived.

what are the types of frms?

the different types of fixed rate mortgages are:
  • 15 year frm:
    this type of loan is paid off in 15 years. the monthly payments higher than a 30 year fixed because you have a shorter time period to repay the loan. the total interest payment is lower as the amortization period is shorter.

  • 30 year frm:
    these are payable over 30 years. the monthly payments are lower than 15 year mortgages because the interest is amortized for a longer period of time. to get an idea of 30 year fixed mortgage rates, check out the rates section.

  • 40 year loan:
    this is a fixed rate loan paid off over 40 years. the monthly payments are lower in comparasion to a 15 or 30 year loan, but you'll pay more in interest. learn more ...

  • bi-weekly mortgage:
    with this type of home loan, you make payments twice a month (every 2 weeks) instead of making payments at the end of every month. each bi-weekly payment is 1/2 of the standard monthly mortgage payment. know more ...
  • convertible mortgage:
    convertible loans are flexible mortgages that allow a homeowner to take out a loan that can be easily converted. learn more ...

  • balloon mortgage:
    this is a short term fixed rate home loan with low monthly payments for 5 to 7 years. at the end of this short term, the remaining balance is paid in a lump sum known as the balloon payment. there is also the option to convert this mortgage into a long term fixed rate loan if the borrower fails to make the balloon payment. learn more...

  • interest-only frm:
    with this kind of loan, you start out paying only the interest, which makes your payments lower. you may make a few extra payments towards the principal. however, after the interest-only period ends, you'll have to make payments including interest and principal. find out more on how interest-only mortgages work.

    what are the pros and cons of frms?

    check out these pros of taking out a frm:
    1. protection from inflation: because your interest rate doesn't change, your payments aren't affected by inflation. so there's less risk of defaulting.

    2. fulfill long term plans: these loans help you plan for long term financial goals because your payments will never change.

    3. prepayment penalties: you may not have to make a prepayment penalty if you pay off the mortgage before the loan term ends. use the mortgage payoff calculator to find out how much you'll save by extra payments.
    however, there are certain cons associated with fixed rate loans. they are:
    • reduced loan amount: you'll pay higher rates when compared to the low initial rates of an arm. the higher rate often reduces the amount of loan and the home you can afford.

    • what if rates fall: the interest rate on the loan is fixed. if the market interest rates drop, you can't take advantage of the lower rate unless you refinance. and refinancing can cost you more closing costs and other fees.
    if you have a steady source of income and intend to occupy the home for an extended period of time, then a fixed rate mortgage is worth considering. however, check out the pros and cons prior to choosing the best fixed rate mortgage or the cheapest fixed rate mortgage.

    related readings
    meta title: 
    Fixed rate mortgage
Can i have some knowledge on convertible mortgage??
Posted on: 31st Oct, 2005 02:22 am
Hi Benng,

Convertible mortgages can be fixed rate as well as adjustable rate mortgage (ARM). Convertible fixed rate mortgages or the Reduction Option Loan (ROL) allows homeowners to avail a home loan that can be converted to a low interest loan. In such a case, you may have to pay $100 to $200 and a fee equal to 1/4th of a point (1point = 1% of the loan amount). As a borrower, you may be offered a rate equal to 2% below the initial rate while you convert to low rate mortgages during a certain time limit. This option allows you to adjust the interest rates on your loan without going for refinancing which can cost up to 5% to 6% of the loan amount.

Some homeowners will find the ROL to be much cheaper against the high closing costs of refinancing. But there are homeowners who prefer refinancing to ROL because the former gives the opportunity to draw on the built-up equity that is not available with the ROLs.

Convertible adjustable rate mortgage is also quite popular in today's market. It works like any other ARM product but can be converted into a 15 year or 30 year fixed rate mortgage after a certain period of time, that is generally between second and fifth years of the loan. With convertible ARMs in demand, homeowners can make use of inital low rate of an ARM and then benefit from the rate of a fixed rate mortgage, provided the rate on the latter is quite low.

Hope you will be benefited from this information.

Regards,
Jessica.
Posted on: 31st Oct, 2005 03:17 am
really confused between 30 year and 15 year fixed mortgages. can i get some useful advice here?
Posted on: 03rd Feb, 2006 11:31 pm
Hi kelvin,

The basic information on 30 year and 15 year fixed rate mortgages are provided in the section given above. Let me explain some of the pros and cons of taking either of these loans.

30 year loan:

Pros: Lower monthly payments allow borrowers to utilize the extra cash into investments that offer higher yield than their home values. With higher interest payments, customers will be able to deduct more at tax time. Their federal income tax liabilities thus get reduced.

Cons: Borrowers cannot build up equity faster because the payments in the initial years are meant to cover up the interest rather than the principal loan amount. The total interest is higher because of longer amortization period.

15 year loan:

Pros: The interest rates are lower than 30 year mortgages.

Cons: The monthly payments are higher as the loan term is comparatively shorter than that of other long-term mortgages. Homebuyers are thus prevented from buying less expensive houses than they can afford with long term loans.

Thanks,
Caron.
Posted on: 04th Feb, 2006 12:06 am
how do one qualify for a 40-yr fix mortgage...............
Posted on: 10th Jun, 2008 04:56 pm
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