Fixed Rate Mortgage
With a fixed rate mortgage, the interest rate does not change for the term of the loan, so the monthly payment is always the same. Typically, the shorter the loan period, the more attractive the interest rate will be.
Payments on fixed-rate fully amortizing loans are calculated so that the loan is paid in full at the end of the term. In the early amortization period of the mortgage, a large percentage of the monthly payment pays the interest on the loan. As the mortgage is paid down, more of the monthly payment is applied toward the principal.
A 30 year fixed rate mortgage is the most popular type of loan when borrowers are able to lock into a low rate.
Benefits:
- Lower monthly payments than a 15 year fixed rate mortgage
- Interest rate does not go up if interest rates go up
- Payment does not go up, it stays the same for 30 years
Drawbacks:
- Higher interest rate than a 15 year fixed rate mortgage
- Interest rate stays the same even if interest rates go down
A 15 year fixed rate mortgage allows you to pay off your loan quicker and lock into an attractive lower interest rate.
Benefits:
- Lower interest rate
- Build equity faster
- If interest rates go up, yours is fixed
Drawbacks:
- Higher monthly payment stays the same if interest rates go down
- Interest rate stays the same even if interest rates go down
There are also 20-year and 10-year fixed rate mortgages. The rule of thumb is the longer the term, the higher the rate and the lower the minimum monthly payment.
VERY IMPORTANT: you have to be very careful when seeking a mortgage with a term that is shorter than 30 years. You must remember that with a shorter term mortgage, you are still on the hook for that higher payment, regardless of how your life situation may change - job loss, long-term illness, etc. With a 30-year mortgage, you can always pay extra each month to pay the loan off more quickly, but you are only obligated to make the minimum required monthly payment.
Another hazard of a shorter-term mortgage is it impedes your ability to purchase additional properties, like a second home or an investment property. Lenders calculate your monthly debt-to-income ratio based on the minimum required monthly payments on all debt obligations: mortgages, credit cards, car loans, etc. So the higher your minimum monthly payment (like you will get with a shorter-term mortgage), the less you are able to qualify for on future mortgages. This is why we at Highlander Mortgage usually advise our clients who want to take out a 20-, 15- or 10-year mortgage to consider instead taking out a 30-year mortgage so they will be better positioned for the future.
