Fixed Rate Mortgage
Fixed rate mortgage is a very simplified version of other mortgages and hence has gained great popularity. The
feature of this mortgage is that the interest remains fixed through out the period. The borrower pays the principal
amount along with interest amount, which is predetermined. The initial payments are having a higher proportion of
interest and lesser principal amount.
As the time passes the principal amount increases and the interest portion decreases till the time entire mortgage
amount is paid up. At this juncture the principal amount is zero. Hence the interest amount is also zero. The term
used of this stage is amortization of the mortgage.
Besides the payment towards mortgage the borrowers are required to pay towards escrow account created to make
provision for taxes and insurance cost of the property. Any increase in the payment from the borrower is in respect
of taxes and insurance, which one can well imagine.
Fixed Rate Mortgages with Conforming and Nonconforming:
Fixed rate mortgage is known is conforming if the mortgage amount is equal to or less than the amount fixed by
Federal National Mortgage Association and Federal Home Loan Mortgage Corporation. The limit is based on the number
of families living in the property. The fixed rate mortgage is the one, which has higher mortgage value than
specified in the conforming pattern.
Fixed Rate Mortgage Term
The fixed rate mortgage term is the one by the end of which all the loan taken shall get paid up, which varies from
15 years to 30 years. There are other terms also of 10 years, 20 years and 40 years, which can also opted by the
persons seeking fixed rate mortgage availing the term depending upon their need. If the term selected, is short
there is lower rate of interest, but the amount to be paid every month is high. It takes the exactly opposite
direction if the period is of long duration.
Description of Fixed Rate Mortgage in Points:
The description given of interest rate in points instead of in percentage has the mention in points. 1 point is
equal to 1 % of the loan value. If the points are more it means the interest rate is lower.
Many advertisements for fixed rate mortgages will quote an interest rate and points. A point is equal to 1% of a
loan value as an instance of a $100,000 loan 1 point would be equal to $1,000. As an example thee points shall be
expressed like this a Loan may have an interest rate of 6.25% with 1 point, while another may be 6% with 2 points).
In fact, points expressed mean buy down the interest rate and may be interpreted as prepaid interest. That is why
points are put in the annual percentage rate or APR calculation. It is mandatory for the advertisements to express
the interest rate in points. The Mortgages, which are present with no points, have a higher rate of interest
applicable.
Fixed Rate Mortgage Options
There are a number of variations of fixed rate mortgage creating complexity for an ordinary person. Some of these
variations are mentioned below:
No cost loan:
Meaning there no closing costs and there no points reflected in the rate of interest. Closing cost is included
in the rate of interest that is why the rate of interest is high.
In this type of fixed rate mortgage the lender takes fixed interest for few initial years may be for a period of
5 years. After the initial period the payment is of interest and principal amount. In other words principal amount
is paid only after the initial period with fixed interest on it.
Bi-weekly payments:
A mortgage where the mode of payment is bi-weekly has the benefit that the mortgage loan shall get cleared
early. A monthly mortgage loan can be converted into a biweekly on payment of a conversion fee to the lender, if
the funds are available for choosing such a payment mode.
Temporary buy down:
In this type of fixed mortgage loan there is an upfront payment to be made, which helps in getting a lower rate
of interest on the fixed rate mortgage loan. There is reduction of rate of interest every year by 1 % or as
determined by the lender.
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