A Fixed Rate Mortgage ensures that your payments will stay the same over the life of the loan. This has the obvious advantage of enabling you to calculate your monthly expenses without worrying about fluctuations in your mortgage payments over time.
You pay a slightly higher interest rate than you would with an Adjustable Rate Mortgage Loan (ARM), to get the lender to commit to lending you money over the full term of the mortgage. However, if interest rates fall, you may always opt to refinance to a lower rate for the purpose of simply lowering your payment, or cashing out all or some of the equity you have accrued.
Fixed Rate Mortgages are typically available with terms of 10, 15, 20, 25 or 30 years. To calculate mortgage payments (amortization), the loan amount is divided by the number of months in the term, and tax and insurance are added. Payments for 15 and 20 year terms, will be higher than a 30 year loan because they are amortized over a shorter period of time. The shorter this period, the higher the actual payment, but the greater the savings in the amount of interest paid over the life of the loan. For example, a 15 year fixed term will result in paying off your mortgage in 1/2 the time, with huge savings to you in the interest you will pay. This could be an important consideration if you are nearing retirement or have other large expenses to cover, such as your child’s education.
Use the loan calculators on our Loan Info page to compare these programs based on your current loan amount or that of a purchase you are considering. Be sure to add in monthly estimates for property tax and hazard insurance (the “T I” in “PITI”) for a more accurate payment projection.