FIXED RATE MORTGAGE LOANS

With a Fixed Rate Mortgage (FRM) loan the interest rate and your mortgage monthly payments remain fixed for the period of the loan. Fixed-rate mortgages are available for 30, 25, 20, 15 and 10 years.

Generally, the shorter the term of a loan, the lower the interest rate you could get. The most popular mortgage terms are 30 and 15 years. The monthly payments on the traditional 30-year fixed rate mortgage are lower than the payments on shorter term loan. But if you can afford higher monthly payments, a 15-year fixed-rate mortgage allows you to repay your loan twice as faster and save more than half the total interest costs of a 30-year loan.

Fixed rate mortgages are fully amortizing loans and at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal.

1. Benefits:
   1. The borrower always knows what the mortgage payment is,
   2. It is not susceptible to increasing interest rates (as is an ARM)
   3. Perfect when mortgage rates are relatively low

• Warning:
• Higher interest rate then other types of mortgages

Who should consider a Fixed Rate Mortgage Loans:

• Buyers who will stay in the house for a long time
• Buyers who want equal payments for easier financial planning
• Buyers who want to rent out the home in the near future
• Most Importantly: When the mortgage interest rates are low

Fixed Rate Mortgage Programs are:

1. 30-Year Fixed Rate Mortgage Loans

   With 30-Year Fixed Rate Loan the rate and the monthly payments are fixed for the 30-year period.
   1. Benefits:
      1. The interest rate does not change for the life of the loan
      2. Lowest monthly payment of the fixed rate loan choices
      3. Stable payments
      4. Provides maximum tax-deductible interest (ask your tax advisor)
   • Warning:
   • The interest rate is typically higher,
   • If rates decline, your rate will not change,
   • The first 15 years are primarily interest, very little principal reduction,
   • Highest total interest paid over the life of the loan

    

2. 15-Year Fixed Rate Mortgage Loans

   With 30-Year Fixed Rate Loan the rate and the monthly payments are fixed for the 30-year period.
   1. Benefits:
      1. The interest rate does not change for the life of the loan
      2. Lower interest rate of the fixed rate loan choices
      3. Stable payments
      4. Builds equity in your home faster
   • Warning:
   • Higher monthly payments than a 30 year or 20 year mortgages,
   • Less tax deductible interest.

    

3. Buy Down Mortgage Loans

   A Buy Down is a reduction in the interest rate of a fixed rate mortgage loan. You or the seller can pay extra money up-front in exchange for a lower rate over specific terms or over the life of the mortgage by buying discount points. One discount point is equivalent to one percentage of the loan amount.
1. Benefits:
   1. Initial lower rate than a fixed-rate mortgage,
   2. your payments will increase by a given, known amount,
   3. Interest rate could be lower for the life of the loan.
• Warning:
  • Very costly up front.

Buy Down Mortgage Loans are:
• Permanent Buy Down mortgage Loans
  Permanent Buy Down mortgages a fixed rate fully amortized mortgage where the interest is lowered by up-front paid discount points for the life of the mortgage loan
• 3-2-1 Buy Down Mortgage Loans
  The 3-2-1 Buy Down Mortgage is a 30-year fully amortized mortgage but the interest rate increases 1% every year for the first three years and then the interest rate is fixed for the remaining term.
• 2-1 Buy Down Mortgage Loans
  The 2-1 Buy Down Mortgage is a 30-year fully amortized mortgage but the interest rate increases 1% every year for the first two years and then the interest rate is fixed for the remaining term

Who should consider Buy Down Mortgage Loans:

• Buyers who are purchasing a home, when the seller is paying for closing costs
• Buyers who expect their income to rise in the next few years
• Buyers who expect their income to decrease in the next few years

 

1. Balloon Mortgage Loans

   Balloon mortgage loans are short-term fixed rate loans that have fixed monthly payments based usually upon a 30-year fully amortizing schedule and a lump sum payment at the end of its term. At the end of the term you will be required to either pay off the outstanding balance in one lump sum or you can refinance the loan. Balloon loans can have many types of maturities, but most balloons have a term of 5 to 7 years. If you choose to get a balloon loan make sure that you know all the conditions that apply for refinancing.
   1. Benefits:
      1. Lower initial cost than a conventional fixed mortgage,
      2. Lower monthly payments
   • Warning:
   • At the end of the balloon period, you should sell the home, refinance it, or, if the loan is extendible, accept whatever terms the lender offer at that time and pay the closing cost.

   Who should consider a Balloon Mortgage Loans:

   • Buyers who intend to own the home for less than the term of the balloon
   • Buyers who plan to refinance their home within a few years and want a fixed, low payment.

    

2. Graduated Payment Mortgage (GPM) Loans

   Graduated Payment Mortgage Loans are usually considered a "fixed rate loan" although the payment changes from a "more affordable" payment to a higher payment over the first couple years of the loan period.

   As the interest rate is the same throughout the loan the first years payments may not cover the actual interest owed, therefore the loan may negatively amortize. Lenders offer different GPM payment plans, which vary in the rate of payment increases and the number of years over which the payments will increase. The greater the rate of increase or the longer the period of increase, the lower the mortgage payments in the early years.

   1. Benefits:
      1. Stable and predictable payments allow you to plan your finances,
      2. Lower monthly payments at the beginning of the loan term
   • Warning:
   • Possible negative amortization at the beginning,
   • The monthly payments after the initial period will eventually be higher in order to catch up from the lower payments at the beginning.

   Who should consider a Graduated Payment Mortgage Loans:

   • Buyers who initially need a lower rate than a traditional fixed rate loan,
   • Buyers who will stay in the house for a long time
   • Buyers who want equal payments for easier financial planning