What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a type of house loan in which the interest rate remains steady, or “fixed,” during the duration of the loan. This means that nevertheless of developments in the bigger financial market, the interest rate you get at the beginning of the mortgage term will not alter over time.
A fixed-rate mortgage has a specified principle amount and interest rate that does not alter during the life of the loan. This provides homeowners with a predictable monthly mortgage payment since it stays consistent during the loan’s life.
Although additional alternatives may be available depending on the lender, the most popular fixed-rate mortgage durations are 15 years and 30 years. Fixed-rate mortgages usually have somewhat higher interest rates than adjustable-rate mortgages (ARMs), which are liable to vary over the loan period.
The steadiness provided by a fixed-rate mortgage is one of its primary benefits. Because the interest rate stays constant, homeowners can manage and organize their money without fear of monthly mortgage payment variations. This makes managing home budgets and long-term planning simpler.
What are the different types of fixed-rate mortgage?
Fixed-rate mortgages come in numerous varieties, including:
1. Fixed-rate conventional Mortgage
Traditional lenders like banks and credit unions provide the most prevalent fixed-rate mortgage. The loan durations normally run from 15 to 30 years, with the monthly payments constant.
2. Fixed-Rate FHA Mortgage
The Federal Housing Administration (FHA) equips government-insured fixed-rate mortgages. These loans are planned to help low- to moderate-income borrowers who might not be suitable for conventional financing. FHA loans typically have lesser qualifying standards but could be subject to extra payments, like mortgage insurance premiums.
3. Fixed-Rate USDA Mortgage
The United States Department of Agriculture (USDA) offers fixed-rate mortgages via its Rural Development program. These loans enable rural homeownership by equipping appealing financing options for eligible low- to moderate-income borrowers.
What is an example of a fixed mortgage rate?
The 4.5% interest rate on a 30-year fixed-rate mortgage is an instance of a fixed mortgage rate. Assume you borrow $300,000 to purchase a residence.
With a 30-year fixed-rate mortgage, the 4.5% interest rate remains the same for 30 years. Here’s how to calculate the monthly payment:
Calculate the interest rate for every month
Monthly Interest Rate = Annual Interest Rate / 12
In this point, the monthly interest rate will be 4.5% / 12 = 0.375%.
Calculate how many weekly payments there will be.
Number of Payments = Loan Term (in years) x 12
For a 30-year term, the number of payments will be 30 x 12 = 360.
Use the below method to calculate the monthly mortgage payment
Monthly Payment = (Loan Amount x Monthly Interest Rate) / (1 – (1 + Monthly Interest Rate)^(-Number of Payments))
Monthly Payment = ($300,000 x 0.00375) / (1 – (1 + 0.00375)^(-360))
The example cost would be about $1,520.06 per month by putting in these numbers.