If you have not applied for a new home loan in quite some time, this article will explain the very basics of the home loan known as the fixed rate mortgage. This is a relatively easy mortgage to understand and is familiar to individuals who are purchasing or refinancing a home. As this is one of the biggest expenses you may encounter in your life, knowing a little about this type of mortgage will lay a foundation for you to be able to research both fixed rate mortgages as well as other mortgage products which have their foundation in this basic model.
These fixed rate mortgages are the most common type of mortgage product. They are not the only type of product, of course, by they are very prevalent. When people speak about getting a home loan, they are usually referring to this type of loan. The fixed rate mortgage product is the one that is probably advertised the most, at least with most state laws, the advertising you'll here on the radio or see on TV or other media is typically providing information about their lowest fixed rate product.
The fixed rate mortgages have a specific time period with them, such as a 30 year fixed rate mortgage. There are also 15 years which are probably the second most common. I have also seen 20 year and 40 year mortgages. Lenders have different programs that will work with what you are looking for. There are enough lenders out there that it would be uncommon to find a loan officer who couldn't give you multiple options with your loan duration.
One of the main advantages to the fixed rate mortgage is that the rate doesn't change. This can be great as your payment may stay low for the duration of the loan even if inflation or other financial considerations may change over that same period of time. Some mortgage programs also have a bi-weekly payment option where you'll pay your mortgage every two weeks. Assuming your monthly mortgage was $2000 per month, this is broken down to about $1000 every two weeks which is nice because it has two benefits, one benefit is that it matches some pay structures, i.e. many companies in the US typically pay your salary every 2 weeks. Of course this also means that instead of 12 payments of $2000 or $24,000 per year, you'll pay $1,000 every other week which would be 26 payments (52 weeks per year / 2 (every other week)). The total amount of funds that would then contribute to your loan amount would be $26,000 which would pay down your loan more this way or reduce your overall payment amount. Consult your loan officer for details on the bi-weekly payment plan.
With a fixed rate mortgage, at the end of the term, your home will be paid off completely. Several mortgage products have a balloon payment at the end of the term which means you'll have a larger lump sum, usually a multiple of 10 to 20 times your monthly, or in the event of some interest only products, the principal would be due at the end of only a couple years into the mortgage product which would either require you to pay off the home completely or refinance the balance.
On a typical 30 year fixed rate mortgage, you'll pay your monthly payment of which a percentage of that amount would go toward the principal and the other percentage goes towards interest. This is done on a sliding scale, so the first years of the mortgage, you'll be paying more in interest to the bank than paying down your loan. This is as designed by the banks who fund these mortgages. Their expectation is that they get their interest paid to them before you're "allowed" to use more of your regular monthly payment to go towards the principal. This is all done behind the scenes, but it is interesting to know that you won't start paying more towards your principal than interest until year 22 of your mortgage. There isn't anything to prevent you from paying down your mortgage early, however, and may be a very good idea depending on your life situation.
Getting a fixed rate mortgage is a good program for a large percentage of home owners in today's society. Keep in mind, however, that this is not the only option. But, if you understand the basics of the fixed rate mortgage, you'll better understand the other mortgage products that are available as they are explained to you by your loan officer. It's important to find someone you can trust to work with on your home loan. This will get you most of the way to where you need to be for getting a mortgage or looking into refinancing.
These fixed rate mortgages are the most common type of mortgage product. They are not the only type of product, of course, by they are very prevalent. When people speak about getting a home loan, they are usually referring to this type of loan. The fixed rate mortgage product is the one that is probably advertised the most, at least with most state laws, the advertising you'll here on the radio or see on TV or other media is typically providing information about their lowest fixed rate product.
The fixed rate mortgages have a specific time period with them, such as a 30 year fixed rate mortgage. There are also 15 years which are probably the second most common. I have also seen 20 year and 40 year mortgages. Lenders have different programs that will work with what you are looking for. There are enough lenders out there that it would be uncommon to find a loan officer who couldn't give you multiple options with your loan duration.
One of the main advantages to the fixed rate mortgage is that the rate doesn't change. This can be great as your payment may stay low for the duration of the loan even if inflation or other financial considerations may change over that same period of time. Some mortgage programs also have a bi-weekly payment option where you'll pay your mortgage every two weeks. Assuming your monthly mortgage was $2000 per month, this is broken down to about $1000 every two weeks which is nice because it has two benefits, one benefit is that it matches some pay structures, i.e. many companies in the US typically pay your salary every 2 weeks. Of course this also means that instead of 12 payments of $2000 or $24,000 per year, you'll pay $1,000 every other week which would be 26 payments (52 weeks per year / 2 (every other week)). The total amount of funds that would then contribute to your loan amount would be $26,000 which would pay down your loan more this way or reduce your overall payment amount. Consult your loan officer for details on the bi-weekly payment plan.
With a fixed rate mortgage, at the end of the term, your home will be paid off completely. Several mortgage products have a balloon payment at the end of the term which means you'll have a larger lump sum, usually a multiple of 10 to 20 times your monthly, or in the event of some interest only products, the principal would be due at the end of only a couple years into the mortgage product which would either require you to pay off the home completely or refinance the balance.
On a typical 30 year fixed rate mortgage, you'll pay your monthly payment of which a percentage of that amount would go toward the principal and the other percentage goes towards interest. This is done on a sliding scale, so the first years of the mortgage, you'll be paying more in interest to the bank than paying down your loan. This is as designed by the banks who fund these mortgages. Their expectation is that they get their interest paid to them before you're "allowed" to use more of your regular monthly payment to go towards the principal. This is all done behind the scenes, but it is interesting to know that you won't start paying more towards your principal than interest until year 22 of your mortgage. There isn't anything to prevent you from paying down your mortgage early, however, and may be a very good idea depending on your life situation.
Getting a fixed rate mortgage is a good program for a large percentage of home owners in today's society. Keep in mind, however, that this is not the only option. But, if you understand the basics of the fixed rate mortgage, you'll better understand the other mortgage products that are available as they are explained to you by your loan officer. It's important to find someone you can trust to work with on your home loan. This will get you most of the way to where you need to be for getting a mortgage or looking into refinancing.
About the Author:
Brian Armstrong is a licensed loan officer in the state of Utah. He actively promotes information about Utah mortgage rates on his website. You can also find some detailed information about the services and types of home loans Brian offers from his website about mortgages in Salt Lake City.
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