6 Types of Fixed Rate Mortgages (FRM’s) Described

There are several Types of Fixed Rate Mortgages that give borrower’s the option. However, for most people, there are two main mortgage options: a 15-year fixed rate mortgage loan and a 30-year fixed rate mortgage loan.

A fixed rate mortgage is a common form of a loan with a fixed interest rate and fixed equal monthly installments over the life of the loan. The mortgage term is usually 10, 15, 20 or 30 years. The borrower can decide in how many years he wants to repay the loan. The longer the pregnancy, the lower the monthly payment.

This type of long-term loan is commonly used for home loans. The federal government provides various incentives, such as tax cuts on mortgage interest, to encourage home ownership.

The main advantage of a fixed rate loan is that the interest rate remains the same throughout the term, regardless of inflation and subsequent fluctuations in the interest rate. The borrower never has to worry about raising the interest rate. 

If interest rates fall, you can take advantage of the refinancing opportunity – take a new loan using the same property as collateral at a lower interest rate and pay off the old loan at a higher interest rate.

There are also disadvantages. Since the interest rate risk is solely borne by the lender, the interest rate is higher compared to regulated interest rates on mortgages. 

In addition, since the interest rate is fixed, you will have to pay the same amount despite the interest rate reduction. Refinancing is the only way out that can be cumbersome.

Mortgage rates depend on the economy. Therefore, you need to be patient and wait for the right moment to get a mortgage loan at a reasonable interest rate. Careful research needs to be done before you enter into a fixed rate mortgage deal because different banks offer different rates. 

Most often, the loan depends on the credit history of the borrower and the risks inherent in the mortgage.

Fixed Rate Mortgage – Do You Need it?

Fixed Rate Mortgage Advantages and Disadvantages

If you’re new to your own home, or just wondering what you might need to know when you’re ready, then you need to learn the basics of mortgages. 

Since this is the most important investment in your life, knowing what you are getting yourself into will save you a lot of problems in the long run, as well as help you save money. The choice of the mortgage you make is almost as important as the home you choose – and here’s what you need to know.

Types of Mortgage Loan You Can Get

Your choice of mortgage will often depend on your credit history. For example, people with lower credit ratings will often have fewer mortgage options because they are not considered reliable people to pay off those large loans. 

However, for most people, there are two main mortgage options: a fixed rate mortgage and an adjustable rate mortgage. Each of these options has its own risks and benefits, but more and more financial experts are leaning towards recommending that people choose fixed rate mortgages.

Types of Fixed Rate Mortgages

There are several Types of Fixed Rate Mortgages that give borrower’s the option. They include:

  • 15-year fixed rate loans
  • 30-year fixed rate loans
  • Balloon loans
  • Interest-only loans
  • Convertible mortgages
  • Biweekly mortgages

15- and 30-Year Fixed-Rate Mortgages

When a borrower gets a fixed-rate home loan it means that the interest rates and monthly payments do not change through the life of the loan. This can be a good thing, especially when interest rates fluctuate, as they’ve been known to do in the past. 

A borrower never needs to worry about their payment changing or fluctuating based on the state of the economy. Plus, interest rates are low because the loans are more affordable. 

Fixed-rate mortgages are also known as FRM’s. They are available for terms in between 10-40 years, but the most common terms are for 15-years and 30-years. 

Usually, the shorter the term of the loan, the lower the interest rate will be which can be attractive to some borrowers. Let’s break down the differences between the two most popular Types of Fixed Rate Mortgage loans.

15-Year Fixed-Rate Mortgages

15-year fixed loans are great for people who can afford high monthly payments. Like all other types of fixed rate loans, these loans do not change over time, and the end result is the entire loan is paid off in full. The most popular fixed-rate mortgage is a 30-year term. 

However, many borrowers like the idea of extremely low interest rates and interest savings at the end of the 15-year term and therefore opt to pay higher monthly payments. Interest savings can be over 50% of that in a 30-year fixed rate loan.

The biggest advantage of a 15-year fixed rate loan compared to a 30-year term is that it only takes half the time to pay off the loan. No mortgage payment each month can be a great way to make money too after 15 years. Imagine applying for and receiving a 15-year fixed rate loan from a lender at the age of 30. By the time you are 45, you have many options. 

First, you could stay in the home and not worry about mortgage payments ever again. You also have the option before the end of the term or at the end of the term to refinance and use that money to pay debts, fix up your home, or buy a new property. Moving out doesn’t mean you have to sell the home. 

Tenants, especially ones whom are trustworthy, loyal and responsible can provide a steady income (set at a price you feel is reasonable). Investment properties are generally bought with 15-year fixed rate loans due to the income and financial benefits for the homeowner. Plus, 15-year fixed rate loans can save time and money over traditional loan funds.

30-Year Fixed-Rate Mortgages

30-year fixed loans are as basic as they come. It goes the way it sounds. For 30 years you will pay a fixed rate, resulting in a payoff at the end of the term. If the economy is paying lower rates you still have to pay the amount you were locked in at. 

However, in times like now, when the economy is struggling and interest rates are soaring, you still pay the amount you were locked in at. 

Over time we’ve seen a different trend in interest rates, resulting in record lows. However, they continue to fluctuate month to month. To help reduce monthly payments, homeowners have been refinancing. This makes their homes more affordable when interest rates are low. 

Homeowners have the option to refinance to a 30-year fixed mortgage, also resulting in lower interest rates and monthly payments.

Refinancing does mean a borrower must qualify again. A good credit score is a great start. Plus, refinancing has to do with the equity in your home. If both factors are met, a borrower may refinance their home for a large sum. 

This money is generally used towards the house for repairs or improvements, or such things as medical bills and other bills. It is highly advisable that you talk with many different lenders and compare rates accordingly. Homeowners locked into 30-year fixed loans may have a hard time refinancing at a lower interest rate. 

Unfortunately, when you are refinancing one of these loans, there is no guarantee for a lower mortgage rate or lower monthly payments. This is considered its greatest risk. 

However, lenders may be able to offer qualified home owners assistance if they are struggling to make their monthly payments over the course of the 30-year term.

Balloon Loans

Balloon loans are loans that are usually short-term and do not fully amortize over the life of the loan, leaving a balance due at maturity. The final payment is usually much larger than the previous monthly payments, making it known as a ‘balloon’ payment. 

Balloon loans may have a fixed or ‘floating’ interest rate. Adjustable-rate mortgages (ARM’s) are oftentimes confused with balloon loans, since their only difference is that balloon mortgages may require refinancing or repayment at the end of the period. 

Balloon loans are known to have lower monthly payments than those of 30-year and 15-year mortgages. However, paying off the lender in one large lump sum at the end of the term can be extremely costly. 

Borrowers have been known to wipe out their savings accounts to pay the lender, although most are able to do this by refinancing if applicable.

Balloon loans with refinancing options allow the borrower to convert the mortgage to a fixed rate loan at the end of the term (as long as requirements are met). The most popular refinance balloon loans are in terms of 5/25 Balloon and 7/23 Balloon. Some balloon loans have reset options available at the end of the term. 

For instance, 5-year balloon mortgage with the reset option allows for a resetting of the interest rate and a recalculation for the amortization schedule based on a remaining term. Interest rates are generally based on current interest rates, which can be positive or negative for a borrower.

Pros and Cons of Balloon Loans

Balloon loans one big advantage and one disadvantage. The advantage is that balloon loans are short-term fixed rate loans that have a consistent monthly payment. In most cases, this is based upon a 30-year fully amortizing schedule. 

The disadvantage is that at the end of the term, the borrower must pay the remainder of the loan in one large lump sum. Balloon loans usually have 3, 5, or 7-year terms. Balloon loans can be attractive to borrowers since they typically carry a lower interest rate than a loan with a longer term.

Still, risks are involved that have the ‘buyer beware’ motto. The risk of refinancing and/or risking that the loan will reset at a higher interest rate may or may not be the deciding factor in which a borrower applies for a balloon loan. 

Generally, borrowers who are positive they will sell the home or refinance the loan before the end of the original loan term apply for balloon loans. Oftentimes, these loans offer the borrower a conditional right to refinance into a new loan. 

However, sometimes during this circumstance, borrowers who refinance end up paying more over the length of the refinanced loan based on factors such as the interest rate of both loans and any applicable penalties, fees or additional charges.

Some countries (not the United States) do not allow balloon payment mortgages for residential housing. Instead, the lender must keep the loan going. Generally, the ‘reset’ option is required for this, but to the borrower, there is no risk that the lender will refuse to refinance the original loan or continue the loan.

Interest-Only Loans

An interest-only loan is one that, for a set term, the borrower only pays the interest on the principal balance, and not on the principal balance itself. Interest-only loans are broken down into two periods. During the first period a borrower’s monthly payments are lower since they are only paying the interest and no principal. 

During the second period, you pay on both the interest and the principal, which can greatly increase your monthly payments. Because of the large increase in payments, most lenders qualify borrowers based on the full principal and interest payment, and not the interest-only payment. This helps prevent people from committing financial suicide.

So, who should apply for this type of loan? Several types of people may find this type of loan suitable and appropriate for them. Applicants should:

Understand the monthly payments will greatly increase after the initial period

Can afford this type of loan, paying both interest and principal each month

Can afford this type of loan, paying just interest-only

Potential borrowers who are having financial hardships during the present time should never take on this type of loan with the hope that your financial situation will improve by the time the second period begins. Too many people could vouch that foreclosures and bankruptcy are the likely scenarios for the future.

In the United States, a 5- or 10-year interest-only period is likely. During this initial period, the principal balance is amortized for the remaining term. To put it differently, if a borrower has a 30-year mortgage loan and the first 10 years are interest-only, the principal balance would be amortized for the remaining period of 20 years. 

Borrowers have the option during the first period to pay additional amounts specifically towards the principal, however most borrowers get this loan for opposite intentions.

Types of Interest Only Loans

The most popular types of interest-only loans do not allow borrowers to make interest-only payments during the life of the loan. Generally, it’s limited to 5 or 10 years. The most popular mortgages are:

30-Year loan- Borrowers make interest-only payments for the first 60 months.

40-Year loan- Borrowers make interest-only payments for the first 120 months

How much the borrower has to pay during the initial period depends heavily on the interest rate in the current index. For example, on a 30-year loan, if the interest rate is 6.5% on a $200,000 loan, the borrower has the option to pay $1,083 per month at any time within the first 5 years. For years 6-30, the payment will be $1,264.

How Do You Calculate Interest-Only Payments?

Knowing how to calculate your potential monthly payments can save you time and money. It’s actually quite simple. For example, let’s say you take out a loan of $200,000 and multiple it by the interest rate, let’s say it’s 6.5%. The number you should get is 13,000. 

This is how much interest you will need to pay in interest each year. Now, divide that number by 12. The number you should get is 1,083. So, your monthly payments calculate like this:

$200,000 (loan amount)

X 6.5% (multiplied by interest rate)

$13,000 (annual interest)

$13,000 (annual interest)

/ 12 (divided by 12 months in each year)

$1,083 (monthly payment total)

Now it’s very important to remember that during the initial period you do not have to make payments towards the principal, however it is highly advisable. 

Smart borrowing comes when you utilize the option to pay interest-only only when you have an unexpected expense come up, such as your air conditioner needing to be replaced. This way, you reduce the amount of risk you place on both yourself, your financial future and the lender.

Convertible Mortgages

An convertible mortgage loan is a proper credit that offers the borrower the chance to change over the advance into a fixed-rate mortgage loan. This kind of seizure began in 1983, when the mortgage was extremely high. 

Convertible mortgage loan offer you similar advantages as a shut resource, yet can be changed over into a more extended, shut period whenever with no prepayment cost. 

Convertible mortgage start as an adaptable advance – or a home advance with a variable loan cost.

Biweekly Mortgages

Buying a new home is an exciting time for anyone. A home is a large and personal investment that will likely cost you payments over a very long time, but is it necessary? 

Many banks offer their borrowers various options to reduce the time they have to spend repaying their home. These options are ideal for those who plan to spend a long time in the home or want to use it as an investment to generate more profits sooner rather than later. 

These options include short-term mortgages that pay off in 20 or 15 years, rather than the traditional 30, and biweekly mortgage payments every two weeks.

Why a Biweekly Mortgages are Better?

The advantage of a biweekly mortgages lies in the simple mathematical calculation and also in accounting for the interest that the lender charges the borrower for the purchase of money. 

When a traditional mortgage is taken out, the payments for the first few years (12 in total) are largely eaten up by interest (since the monthly paid money is applied to the interest owed on the loan and initially it is almost 100% of the loan amount). the cost of the loan).

With a biweekly mortgages, instead of paying 12 payments per month, you will pay 26 (52 weeks in a year, which means that in two separate months of the year, you will actually make three payments, not two). 

A simple mathematical advantage can be illustrated by pointing out that if you had a monthly payment of $ 1,000 on a regular mortgage, you would pay exactly $ 12,000 on that mortgage over the course of a year. If you had a two week mortgage for only half of that $ 1,000 and paid $ 500 every two weeks, you would actually pay $ 13,000 that same year on the mortgage. 

While $ 1,000 may not seem like a lot at first, imagine paying an extra $ 20,000 on your loan over a 20-year period — that’s almost two years of regular repayments, and at 6% interest you saved more than $ 1,200 in interest payments.

Finding the right biweekly mortgage lender is not as easy as signing a regular mortgage and sending half of the payment every month – many banks will not accept this practice without prior agreement, and if it is not in your contract, they will refuse to accept (credit) your payments more than once every month. 

You must actually apply and get approval from a lender who works with biweekly mortgages and will work with you to make the schedule and savings work.

Fixed Rate Mortgage Advantages and Disadvantages

The various Types of Fixed Rate Mortgage Loans are suited to borrowers who intend to live in their home for an extended period, and prefer the safety of invariable monthly repayments. 

Many mortgage lenders offer enticements for first-time buyers, such as no arrangement fees, reimbursement of valuation fees or “cash back”, upon completion.

Lower monthly payments than a 10-year fixed rate mortgage Payments are constant for 25 years.

Pay a higher interest rate than a 10-year fixed rate mortgage. Payments stay the same if base rate goes down.

Lower interest rate than a 25-year fixed rate mortgage. Build up equity faster than with a 25-year loan. Payments are constant for 10 years.

Higher monthly payment than a 25- year fixed rate mortgage. Payments stay the same if base rate goes down.

Conclusion

Financial trends and recent economic history may provide clues to possible fluctuations in the base rate, but the result is only an educated guess. It is very difficult to predict changes in the base rate. 

However, fixed rate mortgages tend to accommodate movements in interest rates by setting a fixed interest rate for a predetermined period. They are very useful in some circumstances if the underlying principle and implications of a variable base rate are correctly understood.

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