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Mortgage rates » Fixed Rate Mortgage

Fixed Rate Mortgage

Planning to have mortgage? Before getting into the scouting and computing of interest rates, perhaps, it is time to consider first what type of mortgage you would need to settle with. There are many types of mortgages to choose from such as interest only mortgage, negative amortization mortgage, graduated payment mortgage, balloon payment mortgage, and adjustable rate mortgage; but the two that are most prevalent are fixed rate mortgage and the adjustable rate mortgage.
A fixed rate mortgage is one of the most famous forms of mortgage for product purchasing and for buying a home in the U.S. The terms for FRMs are the 15- year and the 30-year mortgages. These are, obviously, longer terms but there are shorter terms that can be availed and even much longer terms such as 40-year or 50-year mortgages. The concept here is, the longer the years on a specific mortgage, the easier to pay—but there’s always a catch—as the years lengthen, the interest gets much higher.
It is only in the United States that fixed rate mortgages have gained popularity. Outside of the U.S., fixed rate mortgages are made available only on shorter terms. Canadians, for instance, can have fixed mortgages only up to ten years.
By definition, an FRM is a mortgage loan wherein a note’s interest rate is constant throughout the entire term. Compared to loans that may have their interest rates occasionally adjusted or ‘floating’, a fixed rate mortgage gives a feeling of assurance that nothing is changing for as long as the term is ongoing.

Characteristics of Fixed Rate Mortgages

The main characteristic of a fixed rate mortgage is its interest rate (which is inclusive of the amount of loan, compounding frequency, and mortgage term). Given these values, anyone will be able to come up with the monthly payment calculations. Another characteristic for fixed rate mortgages is how they are tied to indexes.

Also, United States fixed mortgages offer prepayment of capital. Early payment does not entail penalties, in fact, it can reduce the cost of the loan as a whole. With prepayments being allowed, the term shortens and the total amount of the loan would be lessened, too. Other mortgages might even offer low interest rates if the borrower would sign up for a prepayment penalty agreement.

How to Calculate Monthly Payments

A fixed rate mortgage has fixed monthly payments which are being paid by the borrower to ascertain that the loan is going to be paid in full (plus the interest) when the loan’s term comes to an end. Let’s assign c as the value for the monthly payment, r as the interest rate, n as the number of payments to be done monthly (or the loan’s term) and p would be the principal. Hence, the formula:

c = (r / (1 − (1 + r)^(− N)) P

Just assign some real numbers into those letters and you would come up with the monthly payments that you are supposed to make. If this computation confuses you, there would always be mortgage calculators online that would compute everything for you in a split second!

Mortgage calculators are much easier to use since all you have to do is to fill in the needed information on the given fields and this tool would be able to calculate for you your exact monthly payments! This tool saves time and even assures the borrower that no miscalculations have been made (talking of human error!).

Fixed Rate Mortgage vs. Adjustable Rate Mortgage

Of the two types of mortgages, it is the fixed rate mortgage that comes with higher monthly payments. Since it is a reality that interest rates can be volatile, there is so much risk in obtaining mortgages that is why coming in with higher payments should compensate for the fixed rate. Also, long-term loans tend to have higher interests as opposed to the short-term loans. The yield curve is the difference between the short-term and long-term interest rates. The inverted yield curve, on the other hand, is an uncommon occurrence.

Although FRMs come with higher interest, it does not make it a bad choice for borrowers. In fact, in the long run, and if interest rates skyrocket, the borrower would be protected from such catastrophes by being assured of the ‘fixed rate’ as what the term dictates.

Although more borrowers opt for adjustable rate mortgage because of the lower payments and even money that can be saved as the term matures, some borrowers are willing to pay for the extra dollars just so they are assured that they will be spared from any financial tragedies in the future. The risk heightens as less money is being shelled out.
Fixed rate mortgage offers certainty during dire economic tragedies but what happens when the economy is riding smoothly and the rates are doing well? Fixed rate mortgages are common and are preferred by those who want to have security with their loans but, yes, the downside is having to pay for those excruciatingly higher monthly mortgage payments.
Once you have decided to choose a fixed rate mortgage, the next thing to know is if you would be able to qualify. A borrower that would get approved for an FRM would be someone who has an excellent credit history. FRMs can be harder to get, with the security that is being offered to the borrower!

Fixed Rate Mortgage History


30 year FRM

15 year FRM





























































Figure 1. Historical Mortgage Rate Data (30-year and 15-year Terms)
Used with permission

The chart clearly shows the volatility of the mortgage rates and this clearly demonstrates why a borrower should opt for a fixed rate mortgage. Last year, based on the chart, the all-time-high was at 6.74 percent for the 30-year FRM while the 15-year FRM had its highest at 6.43 percent. Here, again, you would observe that the longer the term, the higher the interest would be.

What’s Up with Fixed Rate Mortgages

The first quarter of the year 2008 isn’t such a good year for the United States economy. And since the economy is the totality of the many factors that affect mortgages (prices of commodities and gasoline, inflation rate, unemployment rate, and many more), when it goes haywire, interest rates tend to follow.
As of the beginning of the second quarter, 30-year mortgages have hit an all-time-high after 7 weeks. It hit a ceiling of 6.06% according to Freddie Mac which is a recognized mortgage giant. Numerous analysts have noted that the Feds, after cutting a key interest rate recently, would affect the interest rates to remain at their exorbitant level.
Frank Nothaft who works as a chief economist at Freddie Mac has expressed concerns regarding the weakening housing market. All other types of mortgages had mixed results at the closing of the first quarter of 2008.
It is notable, though, that 15-year mortgages have improved as opposed to its 30-year counterpart. It has gone down to 5.59% from 5.62% previously. The year 2007 ended with an average of 6.16% for 30-year mortgages while 15-year mortgages were at an average of 5.87%.

With the rate that the American economy is going, the interest rates should be expected to fluctuate unceasingly.

What to do when Opting for Fixed Rate Mortgage

Given that you have chosen to have fixed rate mortgage, well, congratulations! And since this is harder to acquire, here are some tips on how to be able to qualify for that elusive offer:

  1. First, make sure that your credit history is spotless. There would be higher chances that your loan would be approved at a fixed rate when your credit score is divine. Avoid missed payments on your other loans (even a day or two of delayed check payments would lower your credit score by a few points). Remember to pay all bills on or before the payment due date—this should be your cardinal rule.
  2. Scout for at least three quotations before settling for anything. Do not just settle for any bank out there. Look around and review all of your options.
  3. Evaluate your decision with a trusted relative (or a professional) who knows the ins and outs of mortgage deals. Compare the requirements and payments and once you have settled for your final choice, ask around for your choice’s reputation.

Final Reminders

Do know that all types of mortgages have their advantages and disadvantages. Fixed rate mortgage can work to your advantage if you do understand its strengths and weakness. Remember that this is your future home and your money that are being put on the line so be careful with each step that you take.

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