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Fixed Rate MortgagesFixed rate mortgages are the most common type of home mortgage
offered by banks today. The fixed rate helps provide security and piece of
mind for the home
While property taxes and insurance rates may swell the size of your monthly payment over the years, you are assured that your principal and interest will remain unchanged for the life of the loan. Fixed rate mortgages come in a variety of payment options including 15-year, 20-year, 25-year, and 30-year mortgages. My own mortgage was a 30-year mortgage and as interest rates fell to unprecedented levels, I refinanced the loan to get a lower rate. With the reduced interest rate, I was able to reduce the term to a 15 year fixed loan, cut eight years off the loan, and maintain the same monthly mortgage payment. Now if I only could teach my elected officials to be more frugal with my tax dollars, my monthly payment would remain comfortable for the final years of my mortgage agreement. The two most common mortgage terms are 20-year loans and 30-year loans. These loans provide the security as mentioned above, but you will pay substantial charges over the term of the loan. I do not remember the numbers precisely, but my $100,000 loan would have cost me more than $240,000 over the 30-year life-cycle of the loan period. During the early years of a long-term loan, your payments are primarily applied to debt service. Also, the interest ticker accrues based on when your payment is received by the lending institution each month. If your loan is due on the first day of each month with a late payment date of the 18th of each month, the added 18 days of interest (from the 1st to the 18th) can add up over the course of a 30 year mortgage. I have found that I can reduce my mortgage interest accrual by sending two checks each month to my mortgage lender. My first check (for half of my monthly payment amount) is mailed on the 15th of the month prior to its 1st day due date and the second check is mailed around the 25th of the month prior to its due date. By sending payments in this manner, I save about 5400 days in interest over the course of the loan. This strategy in itself will reduce my loan period by about 5 years and this requires no additional monthly monies from my tight budget. While long-term fixed rate mortgages provide security, you pay dearly for this security in the form of higher interest rates (as much as 15-20%) over short-term or ARM's. Long-term loans require a more substantial down-payment. Also, if you cannot afford to put at least 10% down for your down payment, you may be required to purchase mortgage insurance. Mortgage insurance has always seemed to me to be a waste of borrower assets, because the insurance does not protect the borrower, should they become unable to work and make the monthly payment, it simply protects the lender. With mortgage insurance, you will still lose your home should you fail to make payments, but the banks assets are protected. The wierdness of the whole mortgage insurance scenario is if the home is put up for auction, the bank receives all of its investment from the mortgage insurance company and you are still responsible for any shortfall between the sale price and the loan balance. A 15-year fixed rate mortgage has equal advantages and disadvantages. During the initial loan period more of your payment is applied toward the principal than with a 30 year loan. Consider a 30-year fixed rate $100,000 mortgage at 6% interest compared to a $100,000 fixed rate mortgage at 6% over 15 years Over the course of the 30-year mortgage, you would have invested $215,838.00. The 20-year 6% loan would accrue total payments of $151,894. This amounts to a difference of about $64,000. If you consider that principal and interest payments would amount to about $600 per month over 30 years (30-year loan), almost 9 years of payments would go toward interest payments only. A significant advantage of the 15-year loan is the lower interest rate as compared to the 30-yr fixed rate loan. This mean more equity in your home if you should decide to sell the home before the loan expires. A disadvantage of the 15-yr fixed rate mortgage is many people may not qualify for the higher monthly payments. These payments could be 15-30% higher per month as compared to a 30-yr fixed rate loan. in the example cited above the $600 monthly payment for a 30-yr 6%, $100,000 loan would climb to around $843 per month for the 15-year fixed rate loan. A convertible fixed rate loan or a Reduction Option Loan (ROL) or a Reducing Interest Loan. This option gives you the opportunity to lower your interest rate during the course of the mortgage if interest should fall to a level to which it is worth refinancing your loan. While this is a nonstandard option for most fixed rate loans and each loan contract may vary, some convertible fixed rate loans allow you to exercise your refinance option between certain payment dates. For example, a contract may state that you can exercise your option between the 12th payment and the 60th payment. Typically banks charge a fee ($100-$300) at closing to offer this option. The fee may include a point , but usually the range is 1/4 to 1/2 point. Often, if you opt to purchase this type of option, you may not get the lowest interest rate available at the time of closing. Remember banks must profit from the closing on a loan. Bi-weekly fixed rate loan - As mentioned above, I split my payments into two payments per month and send the first payment on the 15th of the month prior to the due date and the other payment 10 days later. The sooner the payment is received by the bank, the sooner the payment is applied to the loan thus reducing interest paid. This speed up amortization, does cost you any extra each month, and reduces the amount that you pay for the total loan. The bi-weekly fixed rate loan is a more structured version of this philosophy. This loan makes a payment every 2 weeks (26 payments per year-rather than 12) and it lowers interest costs, speeds up amortization, and shortens the term of the loan. If you were to compare a 30-year fixed rate loan with 12 payments per year with a bi-weekly fixed rate loan, you could reduce the term of the loan from 30 years to about 20 years. Many lenders typically charge for this service, so it may be better to initiate this payment plan on your own. This way you have the freedom of changing back to monthly payments should you enter a "crunch" period. Community Home Buyers Program - This mortgage was developed by Fannie Mae to offer low income buyers the option of a loan down payment with a fixed rate mortgage. Typically this loan package is offered to borrowers who would not normally qualify for conventional 30-year fixed rate home loans. This mortgage compares your earnings with the earnings in your local area. To qualify your income must be at or below the average median income level of your local area. However, Fannie Mae may waive this requirement in many cities across the US. This mortgage allows as little as 3% down payment. Many local community organizations may help secure this down payment through alternative loan or subsidized programs. Another real advantage of this program is closing costs are not generally a substantial cost center for the lender in these loans. The requirement of two months advance payment on the monthly mortgage payment can be reduce or waived with these subsidized loans. The lone negative of this program is in almost all cases you must payment a monthly mortgage insurance payment to protect the lender. Growing Equity Mortgages (GEM)- The growing equity mortgage is very rare in today's modern banking industry. This fixed rate mortgage allows low monthly payments during the initial loan period and gradually increase over the term of the loan. The payment structure is establish to fully amortize the loan with payments on the front end of the loan, but as payments increase over time, the term (years) of the loan is reduced. Many GEM loans may pay-off in 15-17 years rather than the published 30-year amortization schedule. An advantage is you will save on total interest paid over the course of the loan. The disadvantage is you are assuming your income will increase over time as your payments increase. In most cases these mortgages are extremely hard to find, but most loans will allow you to initiate this practice on your own by adding to your monthly payments. This places you on a less rigid, more flexible schedule that allows to increase/decrease your optional extra payment as your income allows. Graduated Payment Mortgages - This mortgage begins with low monthly payments and then rise gradually over the next 10 years, before leveling out to an established payment for the remaining years of the mortgage. Another twist on this loan is a loan that automatically adjusts the interest rate (just as any ARM) for the first few years of the loan and then permanently adjusts for the remaining balance of the mortgage term.
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Helton Genealogical DNA Project - Hilton Family Tree - http://hiltonfamilytree.com
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