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Understanding Fixed Rate Mortgages
The fixed rate mortgage is still the favorite choice among homeowners looking to refinance their
mortgages. According to Freddie Mac, the third quarter of 2009 saw borrowers who were
refinancing, chose a fixed rate mortgage over other types of mortgages.
Low Risk
The fixed rate mortgage is easy to understand and carries very low risk. You are given a rate
and you keep that rate until the contract terminates. Basically, when you give up the house or
when you finish paying for it. You are given a payment amount, and it stays the same. It never
changes. Because a fixed rate mortgage never changes, it becomes a very inflexible loan. In
terms of inflation protection, this is the mortgage to get. As the cost of living rises, your
mortgage payment is still the same.
If your personality is one that hates change, then the fixed rate mortgage is the best choice. It is
also ideal for some one who likes long term planning.
Interest only fixed rate
Your mortgage payment consists of an amount for the principal and an amount for interest. You
may consider the principal your share, and the interest the lender's share. The principal portion
reduces the outstanding balance on your mortgage. It represents the equity in your house. The
interest portion represents profit to the lender. As long as the lender gets his profit all is well.
Most lenders will divide an interest only fixed rate mortgage into two parts. The first part will be
100% interest only for 10 years or 15 years, or what ever the parties to the mortgage decide.
The second part will be interest and principal. So, basically the second part is a regular fixed
rate mortgage with both principal and interest payments.
If your lender deals with Freddie Mac mortgages, he might mention these two products;
Initial Interest 10/20 Fixed Rate Mortgage
Initial Interest 15/15 Fixed Rate Mortgage
The first number is the number of years you pay interest only. The second number is when you
pay both interest and principal.
With an interest only fixed rate mortgage, the payment stays the same, but nothing goes to the
principal. This is great for the lender. He lends you $100,00, you pay him every month. At the
end of 5 years you owe him $100,000. At the end of 10 years you still owe him $100,000. As a
matter of fact at the end of any year, before the second part kicks in, you owe him $100,000.
Now, ask yourself the question, "what's in it for me?" You know the answer.
Simple is best
Keep it simple when you decide on a fixed rate mortgage. Ask the lender for the option of
paying the mortgage bi-weekly, and the ability of paying a lump sum of up to 20% of the original
loan amount on the anniversary of the mortgage. You obviously want the best rate, so be
prepared to show the lender what other lenders are currently offering for a fixed rate mortgage.
Have your research ready.
The fixed rate mortgage is still the favorite choice among homeowners looking to refinance their
mortgages. According to Freddie Mac, the third quarter of 2009 saw borrowers who were
refinancing, chose a fixed rate mortgage over other types of mortgages.
Low Risk
The fixed rate mortgage is easy to understand and carries very low risk. You are given a rate
and you keep that rate until the contract terminates. Basically, when you give up the house or
when you finish paying for it. You are given a payment amount, and it stays the same. It never
changes. Because a fixed rate mortgage never changes, it becomes a very inflexible loan. In
terms of inflation protection, this is the mortgage to get. As the cost of living rises, your
mortgage payment is still the same.
If your personality is one that hates change, then the fixed rate mortgage is the best choice. It is
also ideal for some one who likes long term planning.
Interest only fixed rate
Your mortgage payment consists of an amount for the principal and an amount for interest. You
may consider the principal your share, and the interest the lender's share. The principal portion
reduces the outstanding balance on your mortgage. It represents the equity in your house. The
interest portion represents profit to the lender. As long as the lender gets his profit all is well.
Most lenders will divide an interest only fixed rate mortgage into two parts. The first part will be
100% interest only for 10 years or 15 years, or what ever the parties to the mortgage decide.
The second part will be interest and principal. So, basically the second part is a regular fixed
rate mortgage with both principal and interest payments.
If your lender deals with Freddie Mac mortgages, he might mention these two products;
Initial Interest 10/20 Fixed Rate Mortgage
Initial Interest 15/15 Fixed Rate Mortgage
The first number is the number of years you pay interest only. The second number is when you
pay both interest and principal.
With an interest only fixed rate mortgage, the payment stays the same, but nothing goes to the
principal. This is great for the lender. He lends you $100,00, you pay him every month. At the
end of 5 years you owe him $100,000. At the end of 10 years you still owe him $100,000. As a
matter of fact at the end of any year, before the second part kicks in, you owe him $100,000.
Now, ask yourself the question, "what's in it for me?" You know the answer.
Simple is best
Keep it simple when you decide on a fixed rate mortgage. Ask the lender for the option of
paying the mortgage bi-weekly, and the ability of paying a lump sum of up to 20% of the original
loan amount on the anniversary of the mortgage. You obviously want the best rate, so be
prepared to show the lender what other lenders are currently offering for a fixed rate mortgage.
Have your research ready.
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