Bill and Susan are shopping around for different loan types and interest rate structures and notice that there are two different conventional loan mortgage rates. These two interest rates are fixed or adjustable. Bill and Susan will need to determine if a fixed-rate mortgage or an adjustable-rate mortgage best suits them and their financial situation.
As a local mortgage broker in Colorado Springs, The Reichert Mortgage Team knows how confusing and full of new terms the mortgage industry is. From APR to ARM it is not uncommon for people like Bill and Susan to be uneasy when shopping for the perfect mortgage rate. That’s why The Reichert Mortgage Team has developed this detailed blog providing clarification on Fixed-rate mortgages. We want to help you make an educated decision regarding your interest rate that will help secure your financial future.
What Is A Fixed-Rate Mortgage
A fixed-rate mortgage is the simplest version of a mortgage interest rate, where the rate you pay on your mortgage is fixed. In other words for the life of the mortgage, you will only pay one rate which is determined at the beginning of the mortgage. So therefore this means your interest rate will remain fixed. This is especially positive when mortgage rates are low. With a fixed rate you will be able to lock in at a low rate and not worry about the market affecting your monthly mortgage payments down the road.
What Is Amortization
Throughout the process of obtaining a mortgage, you may hear the term amortization, which is the spreading of payments over multiple payments in a period. Amortization is used as the process of obtaining the loan amount over a period of time. In the case of buying a home, a mortgage is a type of amortized loan, where the borrower repays their debt in regular installments over a specified period of time. Below you can find an amortization schedule for a loan of $100,000 at a 3% APR 30-year fixed mortgage rate. View your amortization schedule with our Mortgage Payment Calculators.
In this example, we can see that the fixed rate of 3% APR stays the same allowing the monthly mortgage payment to also remain the same. This allows the homeowner to pay the same amount each month over the course of their 30-year fixed mortgage.
Fixed-Rate Mortgage Terms
The most typical mortgage term or amortization schedule is 30 years. However, you can attempt to pay your loan off sooner with shorter amortization schedules.
30 Year Fixed Mortgage Rates
As we depicted in the image above this loan of $100,000 at a 3% APR 30-year fixed mortgage rate, will have a total of 360 monthly payments over the course of 30 years. So in this example, the 30-year fixed mortgage will allow the homeowner to have a fixed and manageable monthly payment. Although they could opt for a shorter term to save on total interest paid they may not be able to afford a higher monthly payment. If you are trying to determine if a 30-year fixed mortgage is right for you consider what is most important to you. A lower monthly payment, or paying your home off faster and paying less in interest overall. Although we would all like to pay less in interest overall this may not be possible for your specific financial situation so ensure that you will be able to afford the monthly payments.
20 Year Fixed Mortgage Rates
Some lenders offer 20-year fixed mortgages. In this case, you will need to check with your mortgage broker/lender to determine if this option fits your needs. In the case of a 20-year fixed mortgage you will save on interest overall when compared to a 30-year fixed mortgage, however, your monthly payment will be higher.
15 Year Fixed Mortgage Rates
15-year fixed mortgages are the second most common amortization schedule allowing you to save on interest overall while paying the loan off in half the amount of time. A 15-year fixed mortgage will have a much larger monthly payment than that of a 30-year fixed mortgage.
10 Year Fixed Mortgage Rates
Some lenders offer 10-year fixed mortgages. In this case, you will need to check with your mortgage broker/lender to determine if this option fits your needs. In the case of a 10-year fixed mortgage, you will save a significant amount on interest overall when compared to a 30-year fixed mortgage, however, your monthly payment will be much higher. This type of mortgage loan is reserved for those that have the money to make significant monthly payments and are highly motivated to pay off the loan as soon as possible.
At the end of the day, it is important to examine all of the available options you have and determine what amortization schedule best suits your current and future financial situation. Consider the following table.
|30-Year Fixed @3% APR||$337.28||$41,422.55|
|20-Year Fixed @3% APR||$443.68||$26,482.65|
|15-Year Fixed @3% APR||$552.47||$19,443.56|
|10-Year Fixed @3% APR||$772.49||$12,698.29|
Fixed-rate Mortgage Pros And Cons
Overall there are many pros and cons of a fixed-rate mortgage. Understanding these can help you make a more informed decision.
- Fixed Monthly Payments
- Protection From Rising Mortgage Rates
- Greater Financial Flexibility
- Qualify For A Larger Loan
- Easier To Qualify
- Fixed-Rate Mortgages Typically Have Higher Rates
- When Mortgage Rates Fall You Will Remain Paying The Same Amount
- Can Be More More costly: An adjustable-rate mortgage or (ARM) could be cheaper if you plan to sell your home or refinance to a fixed-rate loan before the low-rate introductory period ends.
- Takes More Time To Build Equity
Fixed-rate Mortgage Vs. Adjustable-Rate Mortgage
When comparing a fixed-rate mortgage to an adjustable-rate mortgage the first thing to consider is how long you plan to stay in the home. If you plan on staying in the home longer than 10 years a fixed rate will most likely be the better option. This is due to ARM’s introductory rates. An introductory rate is typically a low rate given to a homeowner on an adjustable-rate mortgage which after about 5- 10 years will rise. In other words, if you get an ARM loan today at 2%APR in 10 years that APR could double causing your monthly mortgage to skyrocket overnight.
In this case, a fixed-rate mortgage is a way to go. Although what if during the time you are buying a home interest rates are high. A fixed-rate mortgage would make it so that you are stuck with that high-interest rate for the entire loan.
Overall consider how long you will be staying in the home and what the current interest rates are available.
Fixed-Rate Mortgage Lenders | The Reichert Mortgage Team
In the long run, the type of mortgage you choose will be dependent on your financial situation and personal preferences. Now that you understand what fixed-rate mortgages are and how they work you can make an informed decision about what best fits your needs. If you still need assistance or want a professional opinion our team at The Reichert Mortgage team would be happy to help. As a local mortgage broker in Colorado Springs, we are dedicated to finding the best mortgage solutions, rates, and assisting you throughout the process of buying a home. Reach out or call us at The Reichert Mortgage Today!