A home loan with a fixed interest rate for the whole repayment period, with the same interest rate from the beginning to the end. The terms plan ranges from between 10 and 30 years for a fixed-rate mortgage, a popular product for a homeowner who wants to know how much they will be paying per month.
How It Works
There are different types of mortgage products available; lenders offer adjustable and variable mortgage rates. With variable-rate loans, the interest rate is adjustable above a certain level and changes at a specific period. A fixed-rate mortgage has a constant interest rate throughout the loan period.
Most homebuyers who prefer long term mortgages end up locking in fixed mortgage interest rates. This is the most preferred product because it’s more predictable. The buyer is aware of how much is payable each month. The fixed-rate mortgage does not fluctuate with the market change; it remains constant regardless of the interest rate going up or down.
The payable interest amount varies based on how long the payment period will be, and buyers pay more at the initial stage of repayment; however, the initial repayment interest is usually high. A buyer with a 15-year mortgage payment plan will pay a lower interest as compared to a buyer with a 30-year fixed-rate mortgage.
The popular fixed interest mortgage rate is the 15-year and 30-year plan. The interest rates are higher than of the Treasury bond of the same 30-year repayment period. Most mortgage brokers sell fixed-rate mortgage, but the rates are fixed for a five-year plan, it’s advisable to confirm that the quoted interest rate covers the entire period of the loan.
Type of Fixed-Rate Mortgage
- A 5-year fixed-rate mortgage is has a constant interest rate for the first five years of the payment period, and it later turns into an adjustable mortgage rate. The fixed-rate is less than a 30-year mortgage plan; however, the rates change after the five-year plan. The interest rate increases depending on the current rates. It’s is the best option if paid within five years.
- A 15-year fixed-rate mortgage it’s common due to its lower interest rates, allowing faster principal payoff than the traditional 30-year loan, building up equity. Unfortunately, these 15-year mortgage has a higher payment rate, thus more high default risk if the buyer’s income changes.
- A 30-year fixed-rate mortgage is an affordable loan but with a higher interest rate. A monthly interest rate is less because the repayment period is spread through the 30 years. The best option if the buyer is planning to stay in the home for a longer time. It favors low-income families allowing them to buy houses with lower monthly payments.
The Interest rates for fixed mortgages are strongly connected to the bond market. When the bond rates go up, the fixed-rate mortgage also goes up. Bonds are debts that are repaid with interest and the principal. Mortgage rates of a long term repayment period are based on the yield and the annual returns rate of the bonds.