Fixed-Rate Mortgages

Benefits of a Fixed-Rate Mortgage

Many homeowners like the benefits a fixed-rate mortgage provides:

• Interest rate and monthly payment amounts are fixed for the life of the loan
• Homeowners can budget how much they need to set aside for the mortgage payment
• Homeowners like the stability of a fixed-rate mortgage
• Homeowners can easily understand how a fixed-rate mortgage works

15-Year vs. 30-Year Fixed Rate Mortgages

You can choose the standard 30-year fixed rate mortgage or you can pay off your home loan faster with 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 will have a slightly higher monthly payment, but you will usually pay a lower APR. The APR on a 15-year mortgage is about 0.05 to 1.0 percent lower than the standard 30-year mortgage.

You will also pay your loan off quicker with a 15-year mortgage, saving thousands of dollars in total interest charges.

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

The 15-year mortgage is popular among young home buyers who have sufficient income to pay off their mortgage before their children start college. Their home equity builds up quickly in a shorter period giving them additional financing options for buying a car, paying for college, saving for retirement, etc.

Other Repayment Options

Some mortgage lenders may offer other repayment terms other than the standard 15-year and 30-year term. Other terms may include 10-year, 20-year, 25-year, and in some cases, 40-year terms.

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

Prepayment Options

If you like the option of paying off your mortgage faster with a 15-year term but currently don't have the finances to pay the higher monthly payment, consider pre-paying your mortgage a little each month.

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

You can pay a little extra each month by sending in an amount that is over the minimum amount required. You can pay as little as $1 over the minimum requirement to as much as you like up to your available mortgage balance on your loan. Note that your minimum payment amount will remain the same each month no matter how much you prepay.

Paying an additional amount each month will reduce your mortgage balance over time where you can pay it off anywhere from 1 to 30 years depending on the amount you prepay over time.

This "pay a little extra" option allows you to budget your finances so that you can prepay when circumstances allow.

This option is for homeowners who have the discipline and budget to prepay a little extra each month in order to take full advantage of the reduced cost.

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

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

Also notify 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 two weeks.

For example, say your monthly mortgage payment equals $1000. Under the accelerated payment schedule, you will pay $500 every two weeks. These payments will equal to 26 bimonthly payments, or equivalent to 13 monthly payments.

Under this plan you can pay off your 30-year loan in about 23 years, saving you in total interest charges.

Another way to reduce your loan in the same way is to prepay an additional 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.