A fixed rate mortgage is a loan is that is characterized by an interest rate that is established at the time the mortgage is originated and provides for a level payment for the entire life of the loan. A fixed rate mortgage benefits the homeowner who does not wish to contend with loan repayment amounts that fluctuate with interest rate movements.
30-Year Fixed Rate Mortgage
- Lower monthly payment
- Most affordable
- More cash/savings because payment is lower; easier to bear if the homeowner has repairs to make or comes upon hard times; extra cash allows homeowner to make other investments since cash isn't tied up in the mortgage
- Longer term
- Pay more interest
- Costs more than shorter term mortgages over the life of the loan
15-Year Fixed Rate Mortgage
The 15-Year fixed rate mortgage shortens the term of the loan to 15 years. That means you own your home in half the time. And because the loan is shorter, you'll pay substantially less in total interest—less than half the total interest of a 30-year fixed rate mortgage. On the other hand, because you repay the loan in half the time, the monthly payments are higher than those of a 30-year fixed rate mortgage. For people who can afford the higher monthly payments, this is an excellent choice. It can allow you to own your home before your children start college or before you reach retirement.
- Shorter term
- Often the total interest paid over the life of the loan is lower, less than half the total interest of a 30 year mortgage
- Bigger monthly payment
- Qualification may be difficult because the income requirement is higher
For people willing to make a half payment from each paycheck, this loan offers rapid building of equity. The biweekly mortgage is usually a 30-year fixed rate mortgage.
What's different is that payment for half the monthly amount is made every two weeks. In this way, you make the equivalent of 13 months worth of payments every year.
Also, because your payments are applied to the loan every 14 days, the principal amount decreases faster, saving even more in interest costs. As a result, your loan term shortens to 22 or 23 years, providing a substantial decrease in total interest costs.
- Loan is paid off much more quickly
- Interest savings is significant
- Often automatically deducted from your checking account
- Must be able to budget and make the half-mortgage payment every two weeks
By paying a large sum of money to the lender at the time you take the loan, you can lower the interest rate. That sum is always measured as "points." A "point" is one percent of the principal amount of the mortgage, paid to the lender. (One point on a $100,000 loan would be $1,000.)
There are two types of buydowns: temporary and permanent.
A temporary buydown is an option for borrowers who expect to have a significant increase in income over the coming years. It lowers the interest rate and the monthly payments for the first few years of the loan. The most common type of temporary buydown is the "3-2-1" buydown. For example, an 8 percent loan with a 3-2-1 buydown would have a 5 percent interest rate the first year, a 6 percent interest rate the second year, a 7 percent interest rate the third year, and an 8 percent interest rate beginning the fourth year through the life of the loan. This type of buydown will generally cost three to four points – that is $6,000 to $8,000 on a $100,000 loan.
A permanent buydown lowers the interest rate for the life of the loan. Again, this type of buydown will generally cost six to eight points and will reduce the interest rate by one percent for the life of the loan.
It is often paid by the seller or the builder as an incentive to finalize a sale by creating lower monthly payments. Be aware that the cost of those points may be included in the selling price.
- Lower payments
- High up-front cost to get lower interest rate paid in cash or financed over the life of the loan
- Sales price of home may increase beyond appraised value