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How Do Fixed Rate Mortgages Work?


For many people looking for a mortgage, it can be difficult to figure out exactly which option will give them the best deal. Fixed rate mortgages are one of the oldest, safest, and most common type of mortgage available. When the housing market crashed, it was the long term borrowers with fixed rate mortgages that had the lowest risk of foreclosure. Read on to find out how a fixed rate mortgage works so you can know whether this option is the right one for your family.

One Steady Payment

Fixed rate mortgages provide a long term, steady payment plan for paying off your home. When your lender calculates a fixed rate for your mortgage, you will end up a specific non-variable amount that is due every month for the entire term of your mortgage. Payment plans are generally offered in either a 15 or 30 year term, with the proportion of interest to home cost balance starting at all interest and moving slowly toward paying off primarily the balance over time. This aspect of fixed rate loans makes it profitable to keep your home for as long as possible.

The Lender Assumes The Risk

A fixed rate mortgage will have a higher interest rate than other mortgage types because the lender is assuming the risk that interest on loans will increase. When the economy causes home loan interest rates to rise, your lender will make less money off of your mortgage, and may even begin to loose money. The lender sets the original interest rate high to compensate for this risk.

Early Payment And Refinancing

Because fixed rate mortgages start by paying interest before balance, you can save money on many fixed rate loans by paying off some of the balance amount early. Frequently, refinancing a loan when the market drives interest rates down is used to lower the payment on a fixed rate mortgage by paying off the balance with a new loan at a lower rate. Many banks will offer lower interest fixed rate options that come with a penalty cost for paying off a balance early.

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