How Do Fixed Rate Mortgages Work?

There are many different mortgage products, with the most popular being the Fixed Rate Mortgage, at least in the United States. There are essentially, two parts to a FRM, or Fixed Rate Mortgage. These two parts are the term of the loan and the rate of the loan.

Interest Rates
Unlike other loan products, the interest rate for a FRM or Fixed Rate Mortgage is determined by the lender and is based on various factors. These factors can include, but are not limited to, value of the property, income of the purchaser, age of the purchaser, cosigners, collateral, down payment and others factors the lenders factor into the their risk equations. All of these combine to produce a interest rate that takes into account the risk, value and the current overall government interest rate.

Next, there is the term. Most terms are defined in length of time the loan will go before maturity. The standard terms are 15 and 30 year with both longer and shorter terms available depending on the value of the property and the needs of the mortgage holder.

Both Terms and Rates Combined
A FRM is an amalgamation of both terms and interest rates that are amortized over the length of the term. This rate is fixed, in that the rate does not change from month to month or year to year as it does with other mortgage properties. This has the advantage of holding the monthly payments the same over the term of the note, which has made this a popular mortgage property in the United States.

Over the Long Term
The introduction and use of the FRM has advantages to the homeowner or property buyer in that the payments stay the same throughout the life of the mortgage. As the principle, the amount borrowed, decreases the interest rate stays the same until the final payment. This has the disadvantage to the buyer as the amount of interest paid is higher than potentially could be had under a different mortgage property like a ARM or adjustable rate mortgage. However, this also has the risk of costing the lender more as can occur if the interest rates increase over the amount amortized in the loan.

A Fixed Rate Mortgage is an great way to get into homeownership for new buyers and a great way to manage the long term costs associated with purchasing a home.

Another post from Gina Wilson – Credit & Loans Specialist Blogger.

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