Fixed Rate -
This standard form of a mortgage has two basic characteristics that
do not change throughout the liof the loan: the interest rate and
the repayment term. In addition to the principal and interest the
lender often collects monthly on the amount needed to pay annual taxes
and insurance. This amount can sometimes be known as impound fees
or escrow funds, this amount can be determined by taking the cost
over the year dived by 12. Although, the principal plus interest payment
remains constant over the life of the loan, the amount needed to pay
taxes and insurance may vary, resulting in the change in the total
monthly payment. The accured interest due on the loan is always paid
first, with the balance of the payment allocated to principal, taxes
and insurance accordingly. The result of this standard payment format
is that the borrower begins to build equity with the first monthly
payment.
ARM loans generally have a lower interest rate than fixed rate
loans, and you therefore have a lower payment. However, there are
some cases where the interest rate may be the same or even slightly
lower on a fixed rate loan that on an ARM. In these cases, it is
always better to choose the fixed rate mortgage.
Fixed Rate Mortgages (FRM) are suitable for homeowners who intent
to keep the property for a long time, preferably for the life of
the loan. FRM are also good for homeowners who are uneasy about
the uncertainty in interest rate trends and the potential increase
in future payments that are associated with Adjustable Rate Mortgages
(ARM). To accommadate homeowners who do not intent to keep the home
for more than 10 years and are uncomfortable with the potential
risk of an ARM, most banks offer Hybrid Loans. Hybrid Loans offer
a Fixed Rate period for the initial one, three, five, seven, or
ten years, followed by an Adjustable Rate for the remainder of the
loan term.
You are probably familiar with a fixed rate mortgage. Your parents
more than likely had one, as did their parents before them. The
major advantage of fixed rate mortgages is that they present predictable
housing costs for the life of the loan
One of the misconceptions about mortgage programs the average borrower
has is they truly believe fixed rate mortgages are always best.
When you understand the mortgage business you begin to see why this
is not always the case. When you plan on refinancing your house
in just a few years or selling the home in this time frame you may
want to consider one of the Hybrids to keep your payments lower.
This can save you money over time. Ask your mortgage broker to show
you the difference and compare.
Although your monthly mortgage payment will always remain the same,
the principal payment will go up, and the interest payment will
go down with time. The longer you remain in the mortgage, the faster
you build equity.
The reason your principal and interest change each month is that
you are paying interest on the current amount of the loan. Therefore,
since the amount of the loan goes down with each payment, the amount
of the interest payment also goes down. Since your total principal
and interest payment stays the same, your principal payment goes
up.
Also, if you pay more on your mortgage each month than you are required,
you will build equity faster, in two ways. First, the added payment
goes directly to your equity. Second, you decrease your loan amount,
which means you pay less in interest, and more in principal for
every month, for the rest of the life of your mortgage.
