What are Fixed-Rate Mortgages and How They Work

What are Fixed-Rate Mortgages and How They Work - Texas Trust Home Loans

Purchasing a home can be an exciting journey and a great experience. Although prices of homes and rates of mortgages change all the time, one constant that purchases can safely rely on to is a fixed-rate mortgage for a home that remains the same over time.

Defining Fixed-Rate Mortgage

The interest rate on your fixed-rate mortgage remains fixed for the whole period of the mortgage. This means that the principal and interest payments will remain the same over the life of the loan.

Fixed-rate loans can either be conventional loans or loans guaranteed by the Federal Housing Authority, or loans guaranteed by the Department of Veterans Affairs. A fixed-rate mortgage offers predictability and stability to your finances, and thus it’s viewed as the most popular type of mortgage by the masses.

A fixed-rate mortgage usually has a higher rate of interest as compared to an adjustable-rate mortgage (ARM). However,  the low-interest rate on ARMs in only fixed for a specific period of time (typically, three, five, seven, or ten years). The interest rate can increase or decrease after that fixed time and every year for the remaining loan term; however, most ARMs do come up with a cap.

What are the Terms of Fixed-Rate Mortgages?

Fixed-rate mortgages typically are between 10 to 30 years, where the term is the number of years you have to pay back the loan. Below are some advantages and disadvantages of 15 and 30-year terms mortgages:

30-year mortgage

Advantages:

  • For your loan amount, your monthly loan payments are typically lower than a shorter-term loan.

Disadvantages:

  • In comparison with a shorter-term loan, you have to pay more in total interest over the period of the mortgage.
  • You’ll have a higher rate of interest.

15-Year Mortgage

Advantages:

  • In comparison with a longer-term loan, you’ll have to pay less in total interest over the period of the mortgage.
  • You’ll have a lower rate of interest.

Disadvantages:

  • For your given mortgage amount, your monthly payments will be higher.

Most borrowers prefer a 30-year fixed-rate mortgage over a 15-year fixed-rate mortgage as the monthly payments are lower. If you choose 30-year fixed, you also have the option to borrow more money. You can also free up your cash flow for other financial goals when you pick a longer-term mortgage; you can use this extra cash for a retirement plan, your child’s education expenses, or emergencies.

Whereas a 15-year fixed mortgage is a good option for you if you have extra cash available, and you want to pay off your mortgage faster with lower interest payments. However, you’ll be facing higher monthly payments, because you’ll be paying more in principal. So when you choose a 15-year fixed-rate mortgage, do the math with your lender to make sure that you can easily afford your payments.

Different Mortgage Amount, Same Payments

If you’re a first-time homebuyer with a medium budget and can afford a principal and interest payment of $1500 a month, your lender might offer you the below options:

Fixed 30-year at 4.5%: $1,520 monthly interest and principal for a $300,000 loan

Fixed 15-year at 4%: $1,516 monthly interest and principal for a $205,000 loan

So for almost the same monthly repayment, you can borrow $95,000 more with a 30-year fixed-rate mortgage.  However, you will have to pay much more in interest with a 30-year program.

Different Interest with the Same Amount

For a $300,000 loan:

Fixed 30-year at 4.5%: $247,220 total interest paid over the life of the mortgage

Fixed 15-year at 4.0%: $99,431 total interest paid over the life of the mortgage, or $147,789 less as compared to the 30-year program.

Principal and Interest Calculations

Use our mortgage calculator to find out how much interest and principal you can afford for a mortgage.  We at Texas Trust Loans, offer the most competitive terms and rates to our borrowers with good credit. Please call us on (888) 971-1425 or (214) 245-3929, if you need any further information.

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