Fixed Rate Mortgage
A fixed rate mortgage has an interest rate and payment amount that will not change throughout the term of the loan

Advantages:

  • Fixed payment for the entire length of the loan if Taxes & Insurance are not included in your monthly payments. See our Taxes & Insurance section for reasons you might or might not want to include these items in your monthly mortgage payments.

  • 15-year fixed rate mortgages, 20-year fixed rate mortgages, 30-year fixed rate mortgages, and 40-year fixed rate mortgages among some obscure others are now currently available. Differing term lengths create a greater number of payment options for the consumer. As you would expect: the longer the term, the smaller the payment, however that does not mean that the payments for a 15-year mortgage will be double that of a 30-year mortgage. This misconception is caused by the way interest is calculated and charged for these shorter term loans.
  • Straightforward and easy to understand for budgeting purposes: you will owe X amount of dollars for Y amount of years without any change.

Disadvantages:

  • Because the interest rate is fixed in a fixed rate mortgage; you will need to refinance your loan in order to take advantage of better interest rates should interest rates go down.
  • Longer term Fixed Rate mortgages = More interest paid
  • Interest rates for fixed rate mortgages are typically higher than those for Adjustable Rate Mortgages

Fixed Rate Mortgage Types & Options:

  • Bi-weekly mortgage or bi-monthly mortgage – As the names imply, these mortgage types have two payments per month. What’s the difference you ask? Plenty, actually. A bi-monthly mortgage is essentially the same as a typical monthly mortgage except that payments are made twice a month – monthly mortgage payment split in half and paid every two weeks. A bi-weekly mortgage deducts the amount reduced from the principal with every mortgage payment so that the total calculated interest is reduced and therefore reduces the term of the loan. This may seem like peanuts at face value but actually can be quite substantial as a typical 30-year fixed rate mortgage that is set up for bi-weekly payments will be paid off in a little under 24 years. Please see our Bi-weekly Mortgage Rate section to view some Bi-weekly Mortgage Rates.
  • Jumbo or non-conforming mortgage – A Jumbo or non-conforming mortgage is a loan in excess of $417,000. This figure is currently the eligibility limit for purchase by Fannie Mae or Freddie Mac. Nearly all Jumbo or non-conforming mortgages have a higher interest rate then their counterpart; the conforming mortgage. At the time of this writing, February 2008, there is current legislation under consideration to substantially raise this amount to somewhere around $600,000.
  • Balloon mortgage – A balloon mortgage is a mortgage that will have payments that are calculated much the same way as a 15-year fixed rate mortgage, 20-year fixed rate mortgage, 30-year fixed rate mortgage, or 40-year fixed rate mortgage dependant on which option you choose. After a set period of time, typically 5-years, 7-years, or 10-years, the total amount loaned minus the mortgage payments made will be due in a lump sum. Rates for these types of loans are usually lower than both Fixed Rate Mortgage interest rates and Adjustable Rate Mortgage interest rates.
  • Construction Mortgage – A Construction Mortgage is often found as a two-part loan. The first part of the Construction Mortgage will typically be an interest only loan that will charge the loan purchaser an interest only payment based on the amount of the loan that has been spent on the construction project – these loans are usually dispersed on a borrow as you need basis up to a fixed amount. The construction portion of the loan will generally have a term limit of between six and twelve months. The second part of the Construction Mortgage begins upon completion of the construction project at which time the loan purchaser can select the type of mortgage to “roll” the Construction loan into. This can be a Fixed Rate Mortgage, Adjustable Rate Mortgage, Jumbo Mortgage, Balloon Mortgage, etc. A Construction Mortgage will usually have two separate closing periods; one at the construction commencement, the other at construction completion both incurring separate closing fees. Recently some mortgage providers have begun to offer “single closing” construction loans.
  • Interest-Only Mortgage – An Interest-Only Mortgage is a mortgage where a monthly mortgage payment will only cover the interest portion of the loan. This interest-only period of the loan will typically have a term of three, five, seven, or ten years after which the monthly mortgage payments will increase to begin including a portion of the principal of the loan. An Interest-Only mortgage is often selected due to its attractive initial low monthly payments. Interest-Only Mortgage options are available for both Fixed Rate Mortgages and Adjustable Rate Mortgage.
  • Federal Housing Administration (FHA) Mortgage – A FHA Mortgage is a mortgage insured by the Federal Housing Administration that insures the lender against default by the borrower. The FHA Mortgage offers a favorable interest rate to qualifying individuals with poor credit or who may be without the means to make a down payment. A mortgage of this type is subject to size limits that can be found at the following website of the U.S Department of Housing and Urban Development: FHA Mortgage limits.
  • Second Mortgage – A second Mortgage is often a Home Equity Loan or Home Equity Line of Credit (HELOC) both of which are discussed in their own sections. The Second Mortgage can be a Fixed Rate Mortgage, Adjustable Rate Mortgage, or a Home Equity Line of Credit all with their differing interest rate characteristics. In the event of default on a home with both a primary and Second Mortgage, upon fund recovery the primary mortgage is paid first leaving the Second Mortgage with whatever (if anything) is left. As a result, a Second Mortgage will often have a higher interest rate than a primary mortgage (with the exception of the adjustable rate second which will often have lower interest rates much like an Adjustable Rate Mortgage). See our Second Mortgage Explained section to explore Second Mortgages in greater detail. Including links to some handy calculators that will help explain your Second Mortgage options
  • Veterans Administration (VA) Mortgage – A VA Mortgage is a mortgage insured by the Veterans Administration that insures the lender against default by the borrower. This type of mortgage is similar to a FHA Mortgage except that it is available only to persons who have served in the armed services. The allowable limits for these types of mortgage are higher than those allowed for a FHA Mortgage. The United States Department of Veterans Affairs website is the definitive place to find all things and answer any questions regarding a VA Mortgage.

Before You Sign – What to watch out for:

  • Use this Mortgage Shopping Worksheet, provided by the United States Federal Reserve Board, to compare different ARM’s from the same lender, ARM’s from different lenders, or to compare a Fixed Rate Mortgage to an Adjustable Rate Mortgage. This form will give you a detailed view of the cost of differing types of loans both now, and in the future.
  • Ask your lender, Mortgage broker, or Title officer for a copy of your Balance Sheet, Closing Statement, or Settlement Cost Sheet. (This document is called many different things by different institutions; use any of these terms and your lender, broker, or title officer should understand what you’re looking for.) By law, a borrower is entitled to review the settlement cost sheet one business day before closing on the loan – You absolutely must exercise this right and ask questions if you find something you don’t understand! Please follow the link above to find out what should be included in this document and why it matters to you.
  • Check for and ask about prepayment penalties
  • Verify account maintenance fees and/or servicing fees before signing.
  • Ask your lender, broker, or Title officer for an accounting estimate of all up-front fees you will be charged. These charges may come from the lender, title company, other third party, etc.
  • Interest Only Mortgage Options – Understand when principal will begin to be added to your monthly payments.
  • Balloon Mortgage Options – Understand exactly when the balloon payment will be due.
  • Construction Mortgage – to avoid an unexpected set of second closing costs, Verify whether your Construction Mortgage has one or two closings (see Construction Mortgage above).
  • A couple minor additional costs not included on the preliminary closing statement due to last minute unforeseen charges and exact interest calculations should be expected. These costs should be very small and typically not amount to more than a couple hundred dollars.

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We are not mortgage professionals nor do we claim to be. All information on this site is provided for informational purposes only. Individuals should always consult a real estate attorney prior to making any real estate commitments which they may not understand.