Fixed Rate Loans

Want Stability? Choose a Fixed-Rate Mortgage

Fixed-rate loans are the most stable and predictable kind of mortgage loan offered today. With a 30-year fixed rate loan of $500,000 at 6.25% interest, each month's principal and interest payment would be $3,079. Since the payment always remains the same, it's easy to budget every month; for many homeowners, this the most important factor.

Currently, there are 40- and 50-year fixed-rate loans available as well. For the loan described above, the monthly principal and interest payment on a 40-year fixed-rate loan would be $2,839. When amortized for 50 years, the same fixed-rate loan has a monthly mortgage payment of $2,725. In addition, many lenders now offer interest-only payments on their 30-year fixed rate mortgages.

Fixed-rate, interest-only loans

With a 30-year fixed rate loan that is interest-only, the borrower pays only interest for the first 10 years of the mortgage.  Then, the borrower pays principal and interest for the remaining 20 years. This creates a monthly mortgage payment of $2,604 per month for the first 10 years on the loan described above. After the interest-only period has passed, however, the borrower has to pay off the entire principal (plus interest) in 20 years. This later payment is $3,655 per month--over $1,000 a month more than the borrower originally paid. However, if interest rates are high, it might be better to stay in this loan rather than refinance the mortgage.

Why pick a fixed-rate mortgage?

So why do people choose 30-, 40-, and 50-year fixed-rate loans? Security is the main appeal of a fixed-rate loan. The chance to lock into a fixed-rate loan in the 5% or 6% range is very important, especially when we look back to the 1980s, when rates were over 13%. In August 1983, the monthly mortgage payment on our $500,000 loan would have been $5,905…ouch!

Sources
HSH Associates Financial Publishers
Sheryl Landrum, Senior Loan Officer, First Capital Mortgage of San Diego, Bonsall, CA.