Fixed rate conventional mortgages are the easiest mortgage loan for home buyers to understand because the monthly mortgage payment and interest rate amounts won't ever change. Note that your total monthly payment can change if ever the escrow payment goes up or down depending on the change of your tax and insurance assessment. The fixed rate mortgage is perfect for home buyers who are on fixed incomes or who usually do not like to see adjustments made to their mortgage payment.
Benefits of your Fixed Rate Mortgage
Many homeowners like the advantages a fixedrate mortgage provides:
Rate of interest and per month payment amounts are fixed for the lifetime of the loan
Homeowners can budget just how much they deserve to set aside for the mortgage payment
Homeowners like the steadiness of a fixedrate mortgage
Homeowners can easily understand how a fixed-rate mortgage works
15 Year vs. 30 Year Fixed Rate Mortgage
You can choose standard 30 year fixed rate mortgage or you may pay off your home loan faster using a 15-year fixed rate mortgage. The 30-year mortgage term has lower monthly payments, but your APR will be slightly higher.
The 15-year fixed rate mortgage term will have a slightly higher monthly payment, but you'll usually pay a lower APR. The APR for a 15-year mortgage is about 0.05 to 1.0 percent lower than the typical 30-year mortgage.
Additionally , you will pay your loan off quicker with a 15 year fixed mortgage, saving 1000s of dollars in total interest charges.
Review this cost comparison for a mortgage loan of $100,000:
15-Year 30-Year
Interest Rate (APR) 7.50 % 8.00%
Monthly Payment $927.01 $733.76
Number of Payments 180 360
Total Money Spent $166,862 $246,149
Total Interest Paid $66,862 $164,149
The 15 year mortgage is popular among young home buyers who've sufficient income to repay their mortgage before their children start college. Their home equity builds up quickly in a shorter period giving them additional financing options for buying a car, paying for school, saving for retirement, etc.
Other Repayment Options
Some mortgage lenders may perhaps offer other repayment terms other than the conventional 15 year and 30-year term. Additional terms can include 10-year, 20-year, 25-year, and in some cases, 40 year terms.
A common rule to remember may be the longer the term, the higher the interest rate as well as the greater amount of interest you'll pay over time.
Prepayment Options
If you prefer the choice of paying off your mortgage sooner with a 15-year term but currently do not have the finances to pay the higher monthly payment, consider pre-paying your mortgage a little each month.
Let's say, if you start with a fixed rate 30 year term, you will be required to pay for a minimum amount monthly based on a 30 year amortization schedule.
You may pay a bit extra each month by sending in an amount which is over the minimum amount required. It is possible to pay as little as $1 over the minimum requirement to as much as you want up to your available mortgage balance in your loan. Note that your minimum payment amount will remain the same each month no matter how much you prepay.
Paying an additional amount each month will reduce your mortgage balance over time where you'll be able to pay it off anywhere from 1 to 30 years based on the total amount you prepay over time.
This "pay a little extra" option allows you to budget your finances so that you can prepay when circumstances allow.
This option is for homeowners who possess the discipline and budget to prepay a little bit extra every month that allows you to take full benefit of the reduced cost.
One approach to discipline yourself is by establishing a reoccurring online payment schedule through your financial institution. You can even use an outside bill paying service to produce your payments. But there's a cost to such services.
Be aware that some mortgage lenders penalize on prepayment. If a lender offers you a mortgage product that has a prepayment penalty, negotiate the terms to have that prepayment clause removed.
Also inform your lender that any extra cash over the minimum payment is for reducing the mortgage principal, and is not to be used for paying non-accrued mortgage interest.
Accelerated (Bimonthly) Payments:
Many lenders suggest the accelerated repayment schedule - this allows you to pay half of your monthly mortgage payment every two weeks.
As an example, say your monthly mortgage payment equals $1000. Under the accelerated payment schedule, you will pay $500 every two weeks. These payments will equal to 26 bimonthly payments, or comparable to 13 per month payments.
Under this plan you can repay your 30 year loan in about 23 years, saving you in total interest fees.
Another way to reduce your loan in a similar way would be to prepay an extra 1/12th of your monthly mortgage payment every month.
You'll then pay $1,083.33 every month, that will reduce your pay-off time in about 23 years.
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