Unless you plan to buy a home with cash, you’ll need to arrange for financing.
Did you know that almost 90% of homebuyers choose fixed-rate mortgages—with either 15 or 30-year terms—over other mortgage loan products?
Fixed-rate mortgages can offer a number of benefits to potential homebuyers or current homeowners looking to refinance their mortgages.
This blog post will look at how a fixed rate mortgage works and what you can expect for a fixed rate mortgage in 2022.
What is a fixed rate mortgage?
A fixed-rate mortgage is a home loan with a single “fixed” interest rate that remains the same for the lifetime of your loan.
One reason fixed-rate mortgages are so appealing is their predictability and stability. Because increasing interest rates don’t impact fixed-rate mortgages, homeowners don’t need to worry about sudden jumps in monthly mortgage payments.
The only changes borrowers might experience with their monthly fee are with additional expenses, such as property taxes or homeowners insurance.
Different types of fixed-rate mortgages
Fixed-rate mortgages typically come in one of three popular types:
- 5/1 Adjustable Rate Mortgage
- 15-Year Mortgage
- 30-Year Mortgage
5/1 Adjustable-rate mortgage (ARM)
A 5/1 adjustable-rate mortgage (ARM) is a hybrid mortgage that combines both fixed and adjustable interest rates.
The first number refers to how many years you will have a fixed interest rate. The second number refers to how often your interest rate will adjust annually once the fixed period expires.
Using the “5/1 ARM” example above, this mortgage will have a five-year fixed interest rate period and adjust once annually after the initial five-year period.
A 15-year fixed-rate mortgage means the loan has a set term and the interest rate will be the same all the way through.
With a 15-year fixed-rate mortgage, you’ll pay the same interest rate for your last mortgage payment as you did for your first. You’ll also build up equity in your house faster than a 30-year mortgage in the process.
Similar to a 15-year mortgage, a 30-year fixed-rate mortgage will have the same interest rate for the lifetime of the loan, but in this case, the loan amortization will be 30 years.
How does a fixed rate mortgage work?
Economic conditions, inflation, borrower credit and financial health, or loan origination costs can all impact the interest rates mortgage lenders can offer. That’s why rates never stay the same for very long.
But borrowers with a fixed-rate mortgage don’t have to concern themselves with potential fluctuations in the market.
No matter what happens after your loan closes, your interest rate remains “fixed.” This allows you to budget the same amount each month for your mortgage payments.
What your mortgage payment really pays
Your monthly mortgage payment is the interest rate multiplied by the principal amount of your loan, spread out over the lifetime of your loan.
What do they mean by amortization?
The process of paying off your home through a series of equal payments is called amortization.
Because each monthly mortgage payment chips away at the principal amount, you will pay a little less interest.
The more time you take to pay off your loan, the bigger the slice of your monthly payment that goes toward the principal each month.
In the beginning, most of your monthly mortgage payment goes to interest. Then, toward the end of your loan term, most of your payment goes toward the principal.
How long does it take to repay a fixed-rate mortgage?
The length of time it takes to repay your fixed rate mortgage will depend on your terms.
The most common fixed-rate mortgages are for 30-years allowing borrowers to pay off their loan over three decades.
Thanks to the extended timeline, monthly mortgages are less than home loans with shorter terms. This frees up some extra money in your monthly budget for other expenses.
The second most popular fixed-rate mortgage is the 15-year term. 15-year fixed-rate mortgages typically offer lower interest rates. But because you’ll need to pay it back quicker, it generally means paying more each month (compared to a 30-year loan).
15-year fixed-rate mortgages are often a strong choice for homeowners who want to pay off their loan faster while paying less interest.
Additionally, depending on your lender, you may be able to customize your loan terms to between eight and 30 years.
Fixed-rate mortgages vs. adjustable-rate mortgages
If you search for fixed-rate mortgages and get results telling you about adjustable-rate mortgages (ARM), you might be wondering why.
While the interest rate for an ARM adjusts with market changes, they begin with an initial fixed-rate period.
Some homeowners start off with an ARM then refinance their mortgage into a fixed-rate mortgage before the initial period expires.
An ARM mortgage allows borrowers to take advantage of low-interest rates at the beginning of the loan and then switch to another low-interest rate mortgage. Such as FHA loans or VA loans before their rate increases.
The bottom line: Fixed-rate mortgages in 2022 offer certainty in a constantly changing world
With a fixed-rate mortgage, once you lock in your interest rate, you can forget about it for the lifetime of your loan.
There aren’t many things that cost the same today as they did 30 years ago. And there won’t be many things that cost the same 30 years from now, as they do today. But your mortgage can be one of them.
With almost everything rising in cost daily, fixed-rate mortgages can offer peace of mind in a constantly changing world.
Reach out to Assist Home Loans for honest and trustworthy loan officers
Choosing the right mortgage for your home depends on a number of factors, such as interest rates, your credit scores or reports, loan products available through your chosen vendor, your financial situation, and more.
In the end, the best choice is the home loan you feel most comfortable with that suits your specific situation.
There’s no single mortgage or refinancing loan that’s right for every home buyer.
If you’re ready to begin the process of applying for a home loan or looking to refinance your existing mortgage with a lower interest rate, you can start your mortgage application online today.The specialists at Assist Home Loans are available to walk you through every step of the mortgage process and help you make your dream home a reality. Contact us today.