Different Types of Fixed Rate Mortgages

There are many types of mortgages available to you in today's market. The most common type of mortgage is the fixed rate mortgage.  What is a fixed rate mortgage? A fixed rate mortgage loan is characterized by fixed interest rates.  Monthly payments on fixed rate mortgage loans are generally extended over a 15-year to 30-year period.

In the consumer market, a fixed rate mortgage is popular because of its stability. Many prospective home buyers are hesitant to sign up for loans where the rates fluctuate with changing interest rates.  Fixed rate mortgages are generally considered appropriate for buyers who expect to own their property at least 5 years, especially when market rates are low.

Choosing between a 15-year fixed rate mortgage and a 30-year fixed rate mortgage can often be your biggest challenge.  While some consumers prefer a 15-year fixed rate mortgages to build equity faster, others will choose a 30-year fixed rate mortgage because the payments are considerably lower.

Here are some of the advantages and disadvantages of these different types of mortgages.

Advantages and Disadvantages of the 30-Year Fixed Rate Mortgage

• With a 30-year fixed rate mortgage, home buyers have the opportunity to borrow money on a longer-term basis.  Homeowners do not have to worry about changes that may occur in mortgage interest rates over time.  The repayment of principal (the amount borrowed) of a 30-year fixed rate mortgage is amortized over 360 months. Monthly payments for this type of loan are lower than those on 15-year loans.  Lower monthly payments on 30-year fixed rate mortgages can give you some extra wiggle room that you can use on other worthy investments.

• However, keep in mind that that the total interest cost of a 30-year fixed rate mortgage will be higher because of the long amortization period on your loan.  Payments for a 30-year fixed rate mortgage in the early years mostly pay the interest rather than reducing the principal of the loan.  As a result, you will be building up equity slowly.

Advantages and Disadvantages of the 15-year Fixed Rate Mortgage

• A 15-year fixed rate mortgage has a shorter amortization period than a 30 year loan--exactly half as the numbers indicate.  This type of loan allows you to build equity much quicker.  With a 15-year fixed rate mortgage, the total interest paid will be substantially less than a 30 year mortgage if you keep the 15 year mortgage for the full 15 years.  Interest rates for a 15-year fixed rate mortgage tend to be lower than the 30-year loans.

• However, you will have to pay higher monthly payments on these types of loans, especially when compared with 30-year fixed rate mortgages.  You may be restricted to smaller properties and houses than you might be able to afford with a longer-term loan due to these higher payments.
  

Your Lender Can Help

• Ask your lender to quote interest rates and monthly payments for both 30 and 15 year fixed rate loans.  This is easy for them to calculate (including estimated closing costs), so don't be shy about asking.  You also can experiment with various loan terms on this site's Mortgage Calculator.  The higher payments with 15 year loans may or may not fit your budget for the amount you want to borrow.