Like the Rose Bowl, the fixed rate mortgage loan is the “grandaddy of them all.” If your parents had a home mortgage loan, this is almost certainly the kind they had. With keener competition (sometimes it seems like there’s a bank on every corner!) many new and different types of mortgage loans have been created. But that venerable “old” reliable, the fixed rate mortgage loan, is still the best and most popular.
When you obtain a fixed rate loan, you pay the same interest rate for the entire life of the loan. Your property tax and homeowner’s insurance payments will fluctuate, and your bank may require you to make these payments with your loan payment. However, you KNOW what your principal and interest payment will be as long as you keep that loan. Most fixed rate mortgage loans are for 30 years, although you can also get them for 15 or 20 years.
The major disadvantage to fixed rate mortgage loans is that they generally have higher initial interest rates than Adjustable Rate Mortgages (ARMs.). You qualify for a home loan based on your ability to pay the initial payment amoumt, so it is usually more difficult to obtain a fixed rate loan.
Closing costs are often lower. This is not always true, though. However, since the initial interest rate is relatively higher, the bank frequently will not feel the need to charge yield-raising points**. Other costs, such as “document preparation” expenses, can be reduced or even eliminated when the interest rate is a bit higher when the loan is originated.
A fixed rate loan protects you from climbing costs of money. IF rates go up, your payment will stay the same. Of course, IF rates go down, your payment will still stay the same – higher than “market.”. However, you can refinance your home and get these new, lower rates for yourself.
Yes, there will be closing costs when you refinance, but there are 2 major reasons why this should not concern you very much. 1) as previously noted: costs for fixed rate mortgage loans are often lower; 2) if you have proven to your bank that you are a good credit risk (you make your payments) and thus your loan is good for them, they will try hard to keep your business. The bank will want YOU. Their business depends on getting and KEEPING good customers. Therefore, if you refinance at the sane bank that is your existing mortgagee, you will probably save quite a bit of money.
It might be best, i.e. least expensive, to obtain ARMs or other variable-rate type loans if you plan to frequently buy and sell your homes. The lower initial rates will essentially be lower rates for the lives of your loans in that case. But if you plan to slowly decorate and furnish your new home just the way you like, and hope to really get to know your neighbors – basically enjoy your pride of ownership there for years, the long-term security that a fixed rate mortgage loan offers is for you.
This type of loan is pretty much universally available. Traditional offline banks are good sources for fixed rate mortgage loans – “the leaders and best.”
Sometimes called “discount points.” A point is one percent of the amount of the mortgage loan. For example, if a loan is for $25,000, one point is $250. Points are charged by a lender to raise the yield on the loan.