Mortgage option series - Fixed rate option

Feb
07

Welcome back to our first series dealing with mortgage options. There are many different types of mortgage options out there for you to look at, but we will be taking a look at the 5 most popular mortgage types in this series. Today we will be looking at the fixed rate mortgage, its pros and cons and you can decide whether this is the option for you.

To start with, the fixed loan is an amortized type of loan. All that means is that you pay both the principle and interest in the same payment. When you sign on the dotted line, your lending institution will figure out how much interest you will pay on the principle of your loan over the fixed time frame you have agreed on. Then they will average out your payments so that you have the same payment every month. Most lending institutions give you the option of paying more than your minimum payment which would help you pay off your loan faster.

The length of your loan can differ as well. The classic lengths have been 10, 15, 20, and 30 years. Generally speaking, the longer the length of the loan, the higher your rate tends to be. That should make sense as this is where they make their profit for loaning you money. What I find interesting is that now you can actually mortgage your residence for up to 50 years! I don’t know about you but a 50 year mortgage overwhelms me. Even if you are buying a home at the age of 25, you are looking at paying for that real estate property until you are 75 years old. At 75, I want to be enjoying the beach in Fort Lauderdale, not paying a mortgage. But this is an option that you might want to consider as it would be a fixed payment that would be lower and might make your home more affordable. Regardless of the length of your loan,

Pro’s – you know the rate and payment for the length of your loan
Con’s – you tend to pay a higher interest rate than with other options

Let’s talk about points with your fixed rate mortgage. Points basically boil down to how much do you want to spend at closing and how long to you plan to spend in your new home. The trend goes that the more points you pay, the lower your interest rate. So if you can afford the points and want a lower monthly payment, then go for it. However, keep in mind that if you don’t stay put for an average of 7 years, you tend to loose money on points. If you are planning on staying a couple of years and then selling, the fewer points you pay, the better.

Another option within the fixed rate mortgage is my favorite of all options, the bi-weekly plan. Some lending institutions give you the option of paying 1/2 your monthly mortgage payment every two weeks. This is usually automatically deducted from your checking account and it gives you an extra mortgage payment each year as there are 26 bi-weekly payments each year or 13 complete payments. On my last home, had I stayed put and paid off my $135,000 mortgage on schedule, I would have saved 6 years and $36,000 by paying every 2 weeks. That is quite the savings. The only drawback is that for the first month on the plan, you pay the full mortgage payment the first part of the month and then start your bi-weekly payments 2 weeks later. So you pay 1.5 payments the first month.

So there are definitely reasons to go with a fixed rate mortgage. It depends on you and what you want to do with the biggest investment you make as to whether a fixed rate mortgage is right for you.

Stay tuned for the second part in our 6 part series on mortgage options. Next week we will discuss the ARM rate. In the meantime, stop by Best Rate Mortgage House and see how we can help you get the right mortgage option for your situation. See you then.