What Is A Fixed Rate Mortgage?

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Post author:Doug Thaler
Post published:February 10, 2019
Post category:Types of Home Loans
Post comments:0 Comments

The financial markets are flooded with different loan products. The most common of these mortgage loans that are offered is the fixed rate loan. Fixed mortgage loans are typically 15 or 30 year terms.

One of the reasons Fixed rate mortgages are so popular in the consumer market is because of its stability.

For most consumers there is a hesitation to get a home loan where their rate fluctuates with the changing markets. Fixed rate mortgages are generally very affordable, especially when rates are low.

Those that choose a fixed rate mortgages are faced with having to choose between either a 15-year fixed rate mortgage or a 30-year fixed rate mortgage. Some purchasers prefer the 15-year fixed rate mortgage because of the shorter duration. Other home buyers choose the 30-year fixed rate mortgages because the payments are considerably lower than the former.

Each of the fixed rate mortgages has both its own advantages and disadvantages. Here are some of them.

30 Year Fixed Rate Mortgage - Advantages & Disadvantages

A 30-year fixed rate mortgage offers consumers the ability to borrow money on a long-term basis. They do this without having to worry about the change in interest or mortgage rates that may occur over time. It is the lender that is taking the risk.

Because the interest rate on a 30-year fixed rate mortgage is amortized over a longer duration, the monthly mortgage payments for this are lower than the payments on a 15-year loan. Having lower monthly payments on 30-year fixed rate mortgage give the home additional capital that they can use for other investments that may provide a higher return on their investment dollars.

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On the other hand, a 30 year fixed rate could also cause a slight disadvantage for 30-year fixed rate mortgage borrowers. The overall interest rate on a 30-year fixed rate mortgage is much higher because of the longer amortization period. In addition, because payments for 30-year fixed rate mortgages typically pay the interest at the beginning of the loan term rather than the principal, borrowers will be building up their equity at a slower pace than a shorter term loan.

The higher interest rates of 30-year fixed rate mortgage do not necessarily stop consumers from taking this type of loan. One of the reasons is that higher interest fixed rate mortgages also increases the amount that can be deducted at tax time. This could potentially reduce or perhaps, in some cases may eliminate their federal income tax liability.

15 Year Fixed Rate Mortgage - Advantages & Disadvantages

One of the biggest advantages that attract borrowers into taking a 15-year fixed rate mortgage is that amortization periods for this type of loan are shorter. The shorter time period allows borrowers to build their equity much quicker. And with a 15-year fixed rate mortgage, the amount of overall interest being paid is lower – at least, considerably lower than those of a longer-term loan or a 30 year mortgage.

One of the main disadvantages includes significantly higher monthly payments, especially when it is compared with a 30-year fixed rate mortgages. Another drawback of having a 15-year fixed rate mortgage is that it may restrict home buyers to purchase a smaller house than they might be able to purchase with a longer-term loan.

There are also other variables to consider when slecting which type of fixed rate mortgage you want to take on. Keep in mind that you can actually make a prepayment on your fixed rate mortgage, that way, the principal amount will be significantly reduced each month. By making pre-payments, your loan can be paid off earlier which will reduce the amount of overall interest paid.