Fixed Rate Mortgage
A fixed rate mortgage is a loan with a fixed monthly payment that remains the same throughout the life of the loan. With most fixed rate mortgages (FRMs) the debt is fully amortized at the end of the life of the loan. These loans are available for ten, fifteen, twenty, thirty and forty year periods. The traditional fixed rate mortgage has been for thirty years.
The fifteen and thirty year FRMs are the most popular. The forty year fixed rate mortgage is relatively new on the scene and has not, as of the moment, become a popular choice although Fannie Mae is experimenting with them in conjunction with 21 credit unions across the country.
For many years, lending institutions have made fixed rate mortgages available only to individuals with quality credit ratings. While they have loosened somewhat on that requirement, it still applies in many situations. Often, people with credit scores under 700 can only qualify for an adjustable rate mortgage. It has also been traditional that a 20% down payment was required in order to qualify for a fixed rate mortgage. That is still true to some extent, although many people circumvent the issue by borrowing with a second loan (a “piggyback” loan) to assemble the down payment.
There are a number of hybrid loans coming forth these days as lending institutions scramble to develop products that can still make it possible for people to break into the housing market. The difficulties with subprime mortgages has not slowed the lending institutions; it has only made their marketing and product development departments work harder.
One of the advantages of a fixed rage mortgage is the fact that there can be no surprises in the monthly mortgage payment – it stays the same for thirty years or however long the borrower stays in the house. One of the more radical departures from the strictures of the traditional fixed rate mortgage is the fixed rate, “interest only” mortgage. This loan has an initial rate for monthly payments that are only for the interest on the loan.
At the end of the initial period – one year or three years, perhaps – the payment jumps to a full interest and principal payment. If the initial period was three years on a thirty year note, then there are twenty seven years left to pay off 100% of the principal. That mortgage payment is going to take a substantial jump.
All fixed rate mortgages have the same monthly payment, but the mix of principal and interest changes constantly. At the beginning of the loan’s life, the payments are almost entirely interest. As time passes, more of the monthly payment becomes principal. That is a characteristic true of virtually every fixed rate mortgage in this country.