There is a misconception by the general public. They seem to think that fixed rate is always the best way to go. This is not true because everyone's situation is different. If you were only going to be in a home for 3-5 years then it would cost you more money for the fixed vs. an Adjustable Rate Mortgage (ARM).
Although Fixed Rate Mortgages (FRM) may not be financially right for some homeowners, FRM's nonetheless offer the ease of mind of fixed payments for the life of the loan. For those who plan to move or refinance within a few years, an Adjustable Rate Mortgage or a Hybrid Mortgage is usually the answer, especially in a high-interest environment. For homeowners who are not comfortable with the uncertainty of their future mortgage payments, the psychological and mental benefits of knowing the exact monthly mortgage payment for the entire loan term may outweigh the higher starting rate of a FRM.
The rates for fixed rate mortgages change based on the term you choose. Typically 40 year mortgages have the highest rates, followed by 30 year fixed, 25 year fixed, 20 year fixed, 15 year fixed and 10 year fixed.
If you are planning to use the equity in your home to pay for future like remodeling, college tuition, etc., you way want to think twice about locking in a fixed rate for the next 30 years. There is no reason to pay more than you have to today to guarantee a fixed rate 15 years from now that you won’t be able to benefit from.
This standard form of a mortgage has two basic characteristics that do not change throughout the liof the loan: the interest rate and the repayment term. In addition to the principal and interest the lender often collects monthly on the amount needed to pay annual taxes and insurance. This amount can sometimes be known as impound fees or escrow funds, this amount can be determined by taking the cost over the year dived by 12. Although, the principal plus interest payment remains constant over the life of the loan, the amount needed to pay taxes and insurance may vary, resulting in the change in the total monthly payment. The accured interest due on the loan is always paid first, with the balance of the payment allocated to principal, taxes and insurance accordingly. The result of this standard payment format is that the borrower begins to build equity with the first monthly payment.
Fixed Rate Mortgages (FRM) are suitable for homeowners who intent to keep the property for a long time, preferably for the life of the loan. FRM are also good for homeowners who are uneasy about the uncertainty in interest rate trends and the potential increase in future payments that are associated with Adjustable Rate Mortgages (ARM). To accommadate homeowners who do not intent to keep the home for more than 10 years and are uncomfortable with the potential risk of an ARM, most banks offer Hybrid Loans. Hybrid Loans offer a Fixed Rate period for the initial one, three, five, seven, or ten years, followed by an Adjustable Rate for the remainder of the loan term.
One of the misconceptions about mortgage programs the average borrower has is they truly believe fixed rate mortgages are always best. When you understand the mortgage business you begin to see why this is not always the case. When you plan on refinancing your house in just a few years or selling the home in this time frame you may want to consider one of the Hybrids to keep your payments lower. This can save you money over time. Ask your mortgage broker to show you the difference and compare.
Although your monthly mortgage payment will always remain the same, the principal payment will go up, and the interest payment will go down with time. The longer you remain in the mortgage, the faster you build equity.
The reason your principal and interest change each month is that you are paying interest on the current amount of the loan. Therefore, since the amount of the loan goes down with each payment, the amount of the interest payment also goes down. Since your total principal and interest payment stays the same, your principal payment goes up.
Also, if you pay more on your mortgage each month than you are required, you will build equity faster, in two ways. First, the added payment goes directly to your equity. Second, you decrease your loan amount, which means you pay less in interest, and more in principal for every month, for the rest of the life of your mortgage.