Fixed Mortgage Rates Explained

Fixed Mortgage Rates – Will a Fixed Rate Work Best for You?

Before you take out a mortgage loan, you should learn as much as possible about the different features of these financial products. The fixed mortgage rates are definitely worth your attention. Find out how they work and how they compare to their adjustable counterparts. Use some practical advice on how to pick the best fixed rate deal.

Fixed Mortgage Rates Explained

These rates are set in advance and are written in the mortgage loan agreement. They remain fixed throughout the term of the loan irrespective of how short or long it is. The lender does not have the right to change them.

The fixed mortgage rates are based on the prime rate set by banks. Currently, the prime rate in the US is 3.25%. This means that you can expect the fixed rates on mortgages to be higher. The fixed rate of a particular loan is based on three groups of factors. These are the market factors, the mortgage-specific factors and the borrower-specific factors. For instance, loans with longer term tend to have a higher fixed rate. This is done so that the lender is shielded against future interest fluctuations. Similarly, individuals with higher credit score will receive lower interest.

All fixed rate loans have a monthly installment with a fixed size. It will not change throughout the term of the mortgage and this makes it easier for the borrower to plan their spending and to stick to their budget. There will be no balloon payments which may make the repayment difficult.

There are various mortgage products with fixed rates available in the market. The most commonly available ones are the 15-year and 30-year loans. You can readily go for a loan with a term of 5 or 10 years, if you are willing to have larger monthly payments. There are also fixed rate mortgages with term of 40 to 50 years. These are available primarily in areas where property prices tend to be quite high.

Interest Rate and APR

When you consider fixed mortgage rates, you should be aware of the differences between fixed interest rate and fixed APR (annual percentage rate). APR is the total finance charge on a loan. It includes the rate of interest plus all fees, mortgage points and insurance charges. The APR mortgage rate is the more complete measure of the total cost of the loan compared to its counterparts. However, it is the interest rate which is used for calculating the monthly principal and interest payment.

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Fixed Rates vs. Adjustable Mortgage Rates

Historically, fixed rate mortgages have been more expensive than their adjustable rate counterparts, even though there are some exceptions. This, however, has not had great impact on their popularity. Most borrowers prefer to deal with fixed mortgage rates for one reason – certainty.

You can be absolutely sure that no matter what happens your monthly mortgage payment will remain the same. You will not have to worry about it becoming way too big for your pocket. You will be able to manage your monthly budget more effectively.

Fixed Rate Mortgage Comparison

As a borrower, your main task is to find the product which offers the best mortgage rate in the market. This is not a difficult task. You simply need to compare as many mortgage deals as possible. Collect quotes from all reputable lenders in your area and do the math to see which one would be most suitable for you.

Generally, the fixed rate is the most important factor for mortgage comparison. It is closely followed by the APR which gives you an idea about the total cost of the loan. The smaller the percentage difference between the interest rate and the APR is the better. You should take into account the size of the monthly payment as well. It must be affordable to you. You should know that loans with smaller monthly installment typically have a longer term and are more expensive.

You need to consider the entire mortgage information that you have at hand when you make the comparison. Look closely into all fees and charges. Pay attention to the terms and conditions of the deal. Check the reputation and financial stability of the lender as well.

Overall, fixed mortgage rates bring certainty even though they make home loans slightly more expensive. They are a good choice for the average borrower who is quite risk-averse. Finding the best deal is easy.

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