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Fixed Rate Mortgage
A fixed rate mortgage is a mortgage where the interest rate stays the same for the life of the loan. This is also known as a conventional mortgage.
The most common fixed rate mortgages are the 30 year and 15 year fixed rate mortgages. Lenders do offer more choices in the fixed rate arena, with terms of 10, 20 and 25 years becoming more common in recent years.
Advantages of a Fixed Rate Mortgage
- The mortgage payments will not change as the interest rate fluctuates.
- The comfort of guaranteed finance cost.
- Plan your expenses with greater confidence.
This is the industry standard. Payments are lower than on any of the shorter term loans and althoug you end up paying more interest than on the shorter term loans, this interest is 100% tax deductible.
A 30 year mortgage results in you paying a total of 2-1/2 times the price of the home when you are done with all the payments.
15 year fixed rate
This is becoming a very common loan option for homeowners who can afford larger payments than those on the 30 year mortgages. Although the term of the loan is half that of the 30 year loan, your payment is not twice as much due to the interest savings.
The interest rates on a 15 year mortgage are typically 1/4% to 1/2% lower than the 30 year loans.
The main advantage of the 15 year fixed rate mortgage is the combination of the shorter term and the lower interest rate that will save you a huge amount of interest over the length of the loan.
20 year fixed rate
During this period of lower interest rates, the 20 year mortgage is a very affordable option for those who cannot afford to make the payment on a 15 year mortgage.
If you have already paid on your mortgage for 5 years and are looking into refinancing, consider the 20 year mortgage. Just look at this comparison for a $150,000 mortgage.
| Loan Term | Rate | Monthly Payment | Total Payments |
| 30 year | 7.50% | 1,048.82 | Payments for
remaining 25 years 314,646.00 |
| 30 year | 6.75% | 972.90 | Payments for
remaining 25 years 291,870.00 |
| 20 year | 5.50% | 1,031.83 | Payments for
the 20 years 247,639.20 |
If your interest rate is now 7.5% you could save $67,006.20 and your payment would even go down almost $76 a month!
Even if your interest rate is 6.75%, your payment would only increase $58 a month and you would save over $44,230.80. Not a bad investment for $58 a month is it? Plus, you have 5 years of no payments at the end of the loan!
Comparing 30 and 15 year fixed rates
Here is a side by side comparison of the total amount you would pay on a $150,000 mortgage for both of these loans.
| Loan Term | Rate | Monthly Payment | Total Payments |
| 30 year | 7.00% | 997.95 | 359,262.00 |
| 15 year | 6.50% | 1,306.66 | 235,198.80 |
| Interest Savings $124,063.20 | |||
Yes, you read that right, you save almost the price of the house over the length of the loan by making the payments for only 15 years.
Summary
A Fixed Rate mortgage is the mortgage to be in during these times of low rates. Since many borrowers cannot commit to making that much more of a payment each and every month to afford a 15 year mortgage, there certainly are other options.
If there is any doubt whether you will or want to make the higher payments of a shorter loan, do not consider it. You can always make higher payments later on and pay off the loan faster.
For other borrowers, that $309 per month may actually add up to more than the above savings if that money were invested in a 401k plan. Especially for those at a younger age.
Discuss the options with your banker and use them for a source of advice, not just an order taker for your new loan. Any good professional wiill have the answers to your questions and perhaps come up with suggestions that you have not thought of.
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Harry
Smith
email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000 |
Drew
Smith
email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770 |
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