subject: Real Estate Loans: Fixed Rate Mortgages [print this page] A fixed-rate mortgage is the most common type to obtain for real estate home buyers and also the easiest to understand. The interest rate doesn't change which means the monthly payments aren't going to either unless the escrow payment changes due to a property tax rate change or insurance adjustment. People who don't want their rates to change or adjustments to occur will benefit from this type of mortgage.
Benefits of a Fixed-Rate Mortgage
The benefits of a fixed rate mortgage vary. First is the fact that monthly payments and interest rates remain the same every single month which allows home owners to set their budgets well ahead of time. It also offers stability and home owners will know how exactly how their loan works.
15 year vs. 30-Year Fixed Rate Mortgages
Fixed rate mortgages work in a number of ways. They typically are terms for either 30 years or 15 years. The 15 year mortgages have higher monthly payments than the 30 year mortgages. The 30 year mortgages will have a higher interest rate than the 15 year though. The difference in interest rates is usually either .5% or 1%. A 15 year loan saves you thousands of dollars in interest.
One example of a loan is for $100,000. In the 30 year mortgage the interest rate is 8% with a monthly payment of $733.76 and a total of 360 payments. The total paid for the mortgage overall is $246,149 and the amount of interest paid is $164,149.
On the contrary, the same loan for 15 years has an interest rate of 7.5%. The monthly payment was $927.01 with 180 total payments. The total spent is $166,862 and the overall interest is $66,862. This loan is paid off quickly before college is started which allows home equity to be built up. This money can often be used for paying off college, buying a car, and a retirement plan. Some other mortgage types include 10 year, 20 year, 25 year, and sometimes even 40 years. Longer terms will typically have higher interest rates.
Prepayment Options
If you want your mortgage to be paid off before the 30 year term but can't afford the 15 year, you can try to pay off a little more each month than the minimum 30 year monthly rate. You can pay any more than the monthly payment that you desire, even if it is only a dollar. Even if you prepay, your monthly payment remains the same every single month. This gives you a time frame of 1 to 30 years when your mortgage can be paid off. This is favored by many people because they can afford to pay more money when their individual circumstances allow it to happen.
You can set up a payment schedule with your bank or even use a bill service to help you make the payments. Sometimes there is a penalty for prepayment. You should consider getting any clauses eliminated that have penalties in place. Anything that you pay in advance is towards the mortgage principal.
Accelerated Payments
Many lenders will give borrowers the option to pay half of the payment for the mortgage every two weeks in a biweekly plan. One way this works is that you pay $500 of your $1,000 a month mortgage payment every 2 weeks giving you 13 monthly payment a year and will cut 7 years off the 30 year mortgage by saving in interest. This is a huge amount that doesn't seem like it adds up quickly but it definitely does. You could also pay 1/12th additional in your monthly payment every month which makes your payment equal to $1,083.33 each month and also keeps your mortgage at 23 years.
