Fixed-rate mortgages have been the mainstay of the home loan industry for decades. Over the years, loan-to-value ratios have fluctuated and interest rates have moved up and down, but the security a fixed-rate mortgage has never lost its appeal.
What is a Fixed-Rate Mortgage?
Fixed-rate mortgages allow for repayment of a debt in equal monthly mortgage payments over a specified period of time. A 30-year amortization period is most common.
Payments are credited first to interest, then to principal.
During the early years of the loan, much of the monthly payment goes toward interest.
Toward the end of the loan period, much of the monthly payment goes toward principal.
Fixed-Rate Mortgage Benefits
Borrowers gravitate toward fixed-rate mortgages in-lieu-of adjustable-rate mortgages because they like the security of knowing exactly how much they will pay per month for principal and interest.
The interest rate is fixed, so if overall interest rates increase, it does not affect the fixed-rate borrower.
Likewise, if overall interest rates decrease, the borrower’s payment still remains the same unless the borrower chooses to refinance the mortgage into a lower rate.
A borrower can choose to make a larger monthly payment and direct the additional portion of the payment to be paid toward principal, thereby decreasing the principal balance of the loan faster. Paying half your monthly mortgage every two weeks pays off your mortgage in about 22 years. One extra payment per year reduces the amortization period to about 26 years. But additional principal payments are not required.