how to understand fixed rate mortgages

Fixed rate conventional mortgages are the easiest mortgage loan for home buyers to grasp because the monthly mortgage payment and interest rate amounts won't ever change. Note that your total monthly payment might change if the escrow payment goes up or down depending on the change of your tax and insurance assessment. The fixed rate mortgage is perfect for home buyers who are on fixed incomes or who do not like to watch adjustments made to their mortgage payment.
Benefits of a Fixed Rate Mortgage

Many householders like the advantages a fixedrate mortgage provides:

Rate of interest and monthly payment amounts are fixed for this life of the loan
Homeowners can budget the amount they deserve to put aside for the mortgage payment
Homeowners like the stability of a fixedrate mortgage
Homeowners can easily understand how a fixed-rate mortgage works

15 Year vs. 30 Year Fixed Rate Mortgage

You'll be able to choose standard 30 year fixed rate mortgage or you can pay off your house loan faster using a 15-year fixed rate mortgage. The 30-year mortgage term has lower monthly payments, but your APR will be slightly higher.

The 15-year fixed rate mortgage term contain a slightly higher monthly payment, but you will usually pay a lower APR. The APR for a 15-year mortgage is about 0.05 to 1.0 percent lower than the common 30-year mortgage.

You will also pay your loan off faster having a 15 year fixed mortgage, saving 1000s of dollars in total interest charges.

Review this cost comparison for a mortgage loan of $100,000:

15-Year 30-Year
Interest Rate (APR) 7.50 % 8.00%
Monthly Payment $927.01 $733.76
Number of Payments 180 360
Total Money Spent $166,862 $246,149
Total Interest Paid $66,862 $164,149
The 15 year mortgage is well-liked among young home buyers that have sufficient income to repay their mortgage before their children start college. Their home equity builds up quickly inside a shorter period giving them additional financing choices for buying a car, paying for school, saving for retirement, etc.

Other Repayment Options

Some credit lenders might offer other repayment terms besides the common 15 year and 30-year term. Additional terms can include 10-year, 20-year, 25-year, and in some cases, 40 year terms.

A common rule to recollect is the longer the term, the higher the rate of interest and also greater amount of interest you will pay over time.

Prepayment Options

If you want the option of paying off your mortgage faster having a 15-year term but currently do not have the funds to pay the higher per month payment, consider pre-paying your mortgage a little each month.

For instance, if you start with a fixed rate 30 year term, you will be required to pay a minimum amount every month based on a 30 year amortization schedule.

You are able to pay a bit extra each month by sending in an amount which is over the minimum amount required. You can pay as little as $1 over the minimum requirement to as much as you prefer up to your available mortgage balance on your loan. Note that the minimum payment amount will remain the same each month regardless how much you prepay.

Paying an additional amount monthly will reduce your mortgage balance over time where you may pay it off anywhere from 1 to 30 years based on the amount you prepay over time.

This "pay a bit additional" option permits you to budget your finances to be able to prepay when circumstances allow.

This option is for homeowners who possess the discipline and budget to prepay a little bit extra every month so that they can take full benefit of the reduced cost.

One way to discipline yourself is by establishing a reoccurring online payment schedule through your financial institution. You can even use an outside bill paying service to make your payments. But there's a cost to such services.

Be aware that some mortgage lenders penalize on prepayment. If a lender offers you a mortgage product that includes a prepayment penalty, negotiate the terms to get that prepayment clause removed.

Also advise your lender that any extra cash over the minimum payment is for reducing the mortgage principal, and is not to be used for paying non-accrued mortgage interest.

Accelerated (Bimonthly) Payments:

Many lenders offer the accelerated repayment schedule - this allows you to pay half of your monthly mortgage payment every 2 weeks.

By way of example, say your monthly mortgage payment equals $1000. Under the accelerated payment schedule, you might pay $500 every two weeks. These payments will equal to 26 bimonthly repayments, or comparable to 13 per month payments.

Under this set up it is possible to repay your 30 year loan in about 23 years, saving you in total interest fees.

Another method to reduce your loan in a similar way is to prepay an extra 1/12th of your monthly mortgage payment each month.

You will then pay $1,083.33 each month, which will reduce your pay-off time in about 23 years.

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