Fixed-rate mortgages have been the mainstay of the home loan industry for decades. Over the years, loan-to-value ratios have fluctuated and interest rates have moved up and down, but the security a fixed-rate mortgage has never lost its appeal. Fixed rate mortgages provide the security of knowing that your interest rate is your interest rate and it will never adjust.
What is a Fixed-Rate Mortgage?
- Fixed-rate mortgages allow for repayment of a debt in equal monthly mortgage payments over a specified period of time. A 30-year amortization period is most common.
- Payments are credited first to interest, then to principal.
- During the early years of the loan, much of the monthly payment goes toward the interest.
- Toward the end of the loan period, much of the monthly payment goes toward the principal.
Fixed-Rate Mortgage Benefits
- Borrowers gravitate toward fixed-rate mortgages over adjustable-rate mortgages because they like the security of knowing exactly how much they will pay per month for principal and interest. It will not fluctuate.
- The interest rate is fixed, so if interest rates increase, it does not affect the fixed-rate borrower since their rate is locked.
- A borrower can choose to make a larger monthly payment and direct the additional portion of the payment to be paid toward principal, this will decrease the principal balance of the loan faster. Did you know that by paying half your monthly mortgage every two weeks pays off your mortgage in about 22 years instead of 30 years. One extra payment per year reduces the amortization period to about 26 years. Keep in mind that additional principal payments are not required.