Fixed Rate Mortgage Definition
For homes purchased in 2013, 82% had fixed rate mortgages, overall 66% of homeowners have fixed rate mortgages.
A Fixed Rate Mortgage, or FRM, is a mortgage loan where the interest rate remains the same for the entire term of the mortgage. Because the interest rate remains the same, the monthly payments remain the same for the entire period of the loan. A fixed rate mortgage was the typical mortgage for many years, before the Adjustable Rate Mortgage and Variable Rate Mortgage gained popularity.
If you purchase a Fixed Rate Mortgage for a 7 year term at 5%, the interest rate will remain at 5%, regardless of whether market interest rates rise or fall. Your interest rate is “locked in”. Compare this to an Adjustable Rate Mortgage where the interest rate, as well as your monthly payment, will rise or fall with the interest rates.
A) If you take out a $200,000 mortgage with a fixed rate of 5% for a 7 year term, your monthly payment will be $1,163.21, assuming a 25 year amortization period. The monthly payment of $1,163.21 will remain the same for the entire term of the loan.
B) Using the same example as above, a 1% interest rate increase on an adjustable rate mortgage with the same initial terms will increase your monthly payment to $1,279.61, an increase of $116.4.
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Advantages of a Fixed Rate Mortgage
With a fixed rate, you know exactly what you are getting, and know exactly what you are paying every month. If your rate is a relatively low interest rate, you need not worry about it rising in the future, and more importantly, your monthly payment increasing. If you expect mortgage rates to rise in the future, a fixed rate may benefit you more.
Disadvantages of a Fixed Rate Mortgage
A fixed rate mortgage generally has a slightly higher interest rate than the initial rate of an Adjustable Rate Mortgage. Also, as interest rates can rise in the future, they can also fall. If interest rates fall, you will end up paying more for a fixed rate. If you purchase your mortgage in a market with significantly high interest rates, you can pay a great deal more on a monthly basis.
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