Fixed Rate Mortgage
Fixed rate mortgages are the most popular home loans for investors and for good reason. A fixed rate mortgage enables the home owner to accurately predict their mortgage payments for the duration of the term, which can be anything up to 30 years.
Fixed rate, also known as traditional or conventional mortgages, offer peace of mind to the investor when interest rates are unpredictable. Plus, a fixed rate mortgage is easy to understand for people who don’t want to be baffled by indexes and other more complicated mortgage systems. More...
How fixed rate mortgages work
If say your fixed mortgage has a 6% interest on top of the principle sum (ie 6% on top of a $100,000 loan) your repayments will first go towards paying off the interest and then the prinicipal. If you only had to borrow $100,000 at 6% over the course of 30 years, total interest payable would be $115,838.
However, your mortgage lender would automatically distribute your payments, first to interest then to principle. As borrower, your concern would be to repay a set amount each month until the mortgage plan has been fulfilled or if we put it in more techinical terms - completely amortized.
Fixed Mortgage Disadvantages
If interest rates drop below the rate you are paying on top of the principle you will effectively miss out on some savings. This is where an ARM pays dividends because a flexible mortgage plan, which fluctuates both up and down in line with market conditions, can save the investor money when rates are low. While a lower interest rate may not phase you on the short term, a period of long term low interest rates can mean a signifcant loss for fixed rate mortgage holders.
Changing mortgages during the course of your plan, which is known as refinancing is not uncommon.. Naturally, however, lenders like to protct their interests and they do so by inserting prepayment penalties into the contract.
Prepayment Penalties
Many lenders build prepayment penalties into fixed rate mortgages in the event the borrower: a) pays off the mortgage early, or b) refinances onto another mortgage.
If you are fortunate enough to be able to repay your mortgage within five years, you will most certainly be required to pay around six months additional interest.
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