Types of Home Mortgages: Fixed Rate Home Mortgage

Definition of a Fixed Rate Home Mortgage

The fixed rate mortgage is the most common type of home mortgage. This type of home mortgage usually carries an invariable interest rate with invariable payments. Although payments may change slightly, this will be because of increases in property taxes and insurance, not the loan parameters. The fixed rate mortgage is a stable mortgage usually offered in 15-year, 30-year, and to a lesser degree 40-year, terms.

The Early Days of Your Fixed Rate Home Mortgage Loan

In the beginning of this loan, your payment will be mostly interest. This annual loan amount is divided out monthly. This means on a loan of $100,000 at a rate of 6% (which amounts to .005% per month) you will pay $500 interest. If your payment is $550, you have only contributed $50 to paying down the principal. However, this means that you will only pay interest on $99,950 the second month. Over time, you can see how this will change your ratio. Unless you pay extra every month toward principal, your payments will be even on principal and interest after 22.5 years of payments.

Payments that Rise with Time

Certain fixed rate mortgages can carry payments that rise with time. This is the graduated payment mortgage. This type of loan helps borrowers who would not ordinarily qualify for a loan, but the rising payment does carry risk. The way this works is to rebalance the total payments the borrower will have to make. For instance, if you would normally have a payment of $1,000 each month for the life of your loan, this is reduced by a percentage. As the loan progresses with time, so does the payment, and at some point it will remain constant for the remaining life of the loan. If you are considering a GPM, talk to your loan company about how they calculate payments.

Interest Only Loans

The fixed rate mortgages also include interest-only mortgages, in which (as the name suggests) the borrower pays only interest and pays principal only if and when she chooses. This condition has a limit, however, and a regular fixed rate mortgage kicks in at the end of this period. Unfortunately, it means that the loan balance will be the same as when the loan was opened unless the buyer has paid principal, and the new payments will be higher than before. This type of mortgage carries the risk that the borrower may not be able to handle the new payment level; besides, a regular FRM without the interest-only option is only a little higher than the interest-only loan. If your loan officer suggest this, ask why and get a calculation of the difference between the interest-only and the straight FHM.