The main feature of a fixed rate mortgage is the fact that the interest rate does not modify over the life of the loan. The borrower pays the same amount without further rate adjustment. Fixed-rate mortgages can have different lengths extending over 10, 15, 30, 40 or even 50 years. Each of these loan packages comes with its specifics and interest rate. Let us take a closer look.
10-Year Fixed Rate Mortgage
The interest rate for such an fixed rate mortgage (FRM) does not vary throughout the 10-year loan term. It is the principal amount that is reduced first and, then, the rest of the payment is accelerated. This kind of loan package makes a viable choice for high-income borrowers who do not want to waste their hard-earned buck in interest rate. The advantage of paying off sooner comes with the downside of high monthly payments. If you can afford it, this could be a very smart move, saving you thousands of dollars in interest rate. The highest interest rate for a 10-year FRM is 7%.
What are the benefits?
- The possibility to save a lot of money if you make high monthly payments.
- The rate remains the same for 10 years, regardless of market changes.
- If you have a high enough income, you can own your house in 10 years at the latest.
15-Year Fixed Rate Mortgage
15-year fixed rate loans are pretty popular, particularly as compared to the traditional 30-year FRM. Such a mortgage has a higher monthly payment than the 30-year FRM, but a lower interest rate. Moreover, the borrower will pay less than half the total interest of the conventional 30-year FRM. If your income allows you to make higher payments every month, you can pay off the loan in a shorter period of time. A young family with children could pay off the mortgage before kids get to college. The 15-year FRM suits well the needs of people with a solid career who want to own their home before retirement.
The highlights of the 15-year fixed rate mortgage are:
- The homebuyer pays off the mortgage and owns the property in a shorter period of time than through a traditional 30-year mortgage.
- There are considerable savings with the interest rate: you will pay 50% less than on a 30-year FRM.
- The interest rate for the 15-year rate mortgage is lower than for a 30-year FRM.
30-Year Fixed Rate Mortgage
The 30-year fixed rate mortgage is usually referred to as “traditional” loan. From all loan types, the 30-year FRM is the most common for first and second home buyers, altogether. The popularity of this loan type is explained by its flexibility: it can be adapted to a large number of financial situations. The program enables home buyers to make low monthly payments with a convenient interest rate. The rate remains unchanged throughout the life of the loan. Several advantages stand out for the 30-year FRM.
- The homebuyer can pay off the loan sooner without prepayment penalties.
- If the homebuyer wants to pay more every month, the home equity increases accordingly.
- The homebuyer has better options to budget efficiently thanks to the low monthly payments.
40-Year Fixed Rate Mortgage
The extended term of the 40-year mortgage allows for smaller monthly payments than those in the traditional 30-year fixed rate mortgage. This kind of loan makes a viable choice for borrowers who wish to have a fixed rate that they can afford every month without putting strain on the budget. Clients who choose such an extensive loan term are either trying to avoid an adjustable home mortgage or they need a lower payment.
The advantages of the 40-year fixed rate mortgage are:
- The low monthly rate allows the borrower to invest or save the extra money.
- The rate remains the same for 40 years, regardless of market changes.
- The payments are lower than for the 30-year fixed home loan.
- The borrower can purchase a larger property than what can be afforded with a traditional 30-year mortgage.
50-year Fixed Rate Mortgage
People who wouldn’t afford a home with some other type of loan, can own a property with a 50-year fixed mortgage plan. This mortgage type resembles the 30-year fixed rate mortgage but it has a longer amortization period. The monthly payments are low because the homebuyer can pay towards the principal during the first part of the repayment schedule. Thus, the 50-year fixed rate mortgage can fit almost anyone’s budget.
Highlights of the 50-year fixed rate mortgage are:
- There is a 50-year repayment schedule for the loan.
- From renter, the borrower now becomes home owner. The program has been designed for those who wouldn’t be able to afford a home otherwise.
- This mortgage works fine for home buyers with fair or bad credit
- The borrower can use the extra money for other expenses or for investments, as the low payments do not cause distress for the budget.
The long term represents the major downside of such a mortgage package. According to the National Association of Realtors 50% of those who are buying their first home are over 32 years old. With a 50-year repayment plan on the mortgage and without payments in advance, homeowners would be in their 80s by the end of the mortgage term. This is quite a discouraging reality if we consider the risks of old age and the problems that accompany it.