- Term limits of a fixed-rate mortgage.
- When fixed-rate is better than adjustable-rate loans.
- How to shop around for the best rates.
A fixed-rate mortgage is a loan where the interest rate on the mortgage note remains the same through the entire term of the loan. Fixed-rate mortgages are available in 15, 20, 25 and 30-year terms. Some mortgage loans are available for shorter terms with a balloon, lump sum payment, at the end of the term. A newer type of mortgage is called a hybrid fixed-rate, combining fixed-rate and adjustable rate mortgages (ARMs), meaning the rate is not fixed for the entire term of the loan. These loans offer lower introductory rates for the first several years and then change to a higher rate for the majority of the loan term.
Fixed-rate mortgages are the way to go if you plan on staying in your home for more than five years. Also, they are currently the preferred loan vehicle, seeing that ARMs are much harder to come by due to today’s credit crunch. When comparing interest rates between a fixed-rate and ARMs, if the difference is less than 0.5 percent, you’re better off with a fixed-rate. Unless you have a crystal ball, it is often difficult to predict interest-rate cycles. A fixed-rate assures you a predictable monthly payment for the term of your loan. Make sure any loan you are interested in does not have a prepayment penalty clause in the mortgage note. Without one, you are free to shop for a better rate if you decide it is a good time interest-rate-wise to refinance.
Be careful of teaser rates
Mortgage interest rates are a competitive arena. Don’t be lured in by teaser rates by some loan brokers. Those low rates come attached with high fees, points (interest charges you pay upfront when you close on your loan) and ancillary costs related to the mortgage. You should remember to shop for the lowest rate accompanied by the lowest fees. National mortgage lending companies who originate and loans and hold them in their own investment portfolios, typically offer the lowest rates and fees. Try our Mortgage Calculator