The longest and most frequently used loan type is called a fixed rate mortgage, or more commonly known as a conventional loan. For the most part, conventional loans hold a duration of 15-30 years. A fixed rate mortgage is a loan that is fully amortized which means that the principal of the loan is paid off over the life of the loan. Also, the interest rate on the note remains the same throughout the entire term of the loan. Fixed rate loans are popular among buyers because there are no surprises with a payment that may fluctuate or increase. These fixed rate loans are not only good for buying homes, but they also benefit in the process of buying RV trailers and motor homes. People who choose a fixed rate mortgage have the intentions of wanting the security of a fixed mortgage payment while taking advantage of the lower mortgage rates.
How the fixed rate or conventional loan works is that the borrower pays a fixed monthly payment ensuring that the loan is paid off completely with interest at the end of its term. In a fixed rate mortgage, the monthly payment depends on the amount borrowed, the interest rate, and the time period it takes to repay the loan in full.
If the home buyer chooses a fixed rate mortgage or a conventional loan, it will give the home buyer the freedom of a fixed rate payment for the duration of the loan. This allows the buyer to enjoy the freedom of a mortgage payment that will not change and remain constant over time. However, fixed rate mortgage payments tend to have a higher interest rate than an adjustable rate mortgage (ARM). But, with an adjustable rate mortgage, the payment may fluctuate over time. Fixed rate mortgages may cost more in the long run if interest rates and the housing market drops in the future. This scenario would make it difficult to gain equity in the home over the first few years. However, if the home buyer plans to remain in the home for a long period of time, then having the stability of a fixed rate loan may be the right choice.
Choosing a 15-year fixed rate mortgage or a 30-year fixed rate mortgage will depend on your financial situation in order to determine the right mortgage term. Each option has its advantages and disadvantages.
A 15-year fixed rate mortgage will allow the buyer to build equity faster, the interest rates will be lower, but the overall monthly mortgage rate will be higher. If you have an emergency fund and can meet savings goals such as retirement and other necessities, then a 15-year mortgage may be best suited for you. Having a 15-year fixed rate loan would allow you to own your home in half the time, while paying substantially less in interest.
A 30-year fixed rate mortgage will allow the loan to be spread out over a longer period of time which essentially makes the monthly mortgage payments lower. A 30-year fixed mortgage will also allow the buyer to have piece of mind that the interest rates and monthly mortgage payment will remain the same over the lifetime of the loan. However, the down side to choosing this loan will include a higher interest rate and slower building of equity on the home.
Many ask if the fixed rate mortgage is the right choice for them. The answer is… it depends. Mortgage rates are still at a historic low which means that it would make more sense for the home buyer to choose a fixed rate mortgage at this time. The home buyer can take advantage of these low interest rates even though they may plan to live in the home for only a short time. Many home buyers use a mortgage calculator to compare the cost of fixed rates to adjustable rates before they make a decision on which plan is better for them.