Mortgage Basics, Ch. 2: Understanding fixed-rate mortgages

Mortgage Basics

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mortgage

Fixed-rate mortgages

By Bankrate.com

Table of contents

Chapter 1: Should you buy or rent?

Chapter 2: How mortgages work

Chapter 3: Your mortgage payment

Chapter 4: Paperwork and fees

Chapter 5: Underwriting

Chapter 6: Closing

Chapter 7: Ownership

Lenders offer several types of mortgages, but the most common are fixed-rate mortgages. These loans feature fixed rates and monthly payments, generally for 15-year and 30-year periods.

They're popular because:

1. Consumers balk at the thought of their house payment rising and falling with interest rates.

2. Whenever rates are low, fixed-rate mortgages are very affordable.

Fixed-rate borrowers face one major choice: 15-year or 30? For some, a 30-year loan makes more sense. For others, a 15-year one does. Here are some pros and cons of each.

30-year fixed rate

Advantages

Disadvantages

Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes.
Higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liabilities.

Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
The overall interest bill is much higher because of the long amortization term.
The interest rates are higher than on 15-year loans.

15-year fixed rate

Advantages	Disadvantages
Borrowers build equity much more quickly due to shorter amortization schedules. Overall interest bills are dramatically lower than those on longer-term loans. Interest rates are lower than 30-year loans.	Monthly payments can be significantly higher than those on 30-year loans. Restricts homebuyers to smaller houses than they might be able to afford with longer-term loans.