What You Need to Know About Fixed Rate Mortgages

When you’re buying your first home, establishing the mortgage financing can be a dizzying experience. Fixed rate mortgages seem to many like the best option, but mortgage financing is not a one-size-fits-all financial decision. Before you make a decision either way, find out what you need to know about fixed rate mortgages. Then, make a decision as to whether it’s the right financing option for you.

Same Mortgage Payments

Fixed rate mortgages offer a sense of comfort to most homebuyers because borrowers know the interest rate and monthly mortgage payments stay the same month after month. For example, if you purchase a home today using a 30 year fixed rate mortgage and your monthly mortgage payment is $1,200, you know that for the next 30 years your mortgage payment is going to be $1,200 (if you even have the mortgage for the next 30 years).

Interest vs. Principal

One of the biggest downsides of a fixed rate mortgage is that the majority of the monthly mortgage payment is made up of interest - interest that you are paying to the lender, meaning you end up paying far more than 100% of the principal balance of the mortgage in the form of interest. A borrower doesn’t really start to chip away at the principal portion of a fixed rate mortgage until about the halfway point. For a 30 year fixed mortgage, this means you’re not reducing a significant portion of your principal balance until about 15 years into it and for a 15 year mortgage, principal reduction starts at about the seven and a half year mark.

There is no doubt that the fixed rate mortgage offers a sense of safety and security to borrowers. On the other hand, how secure can you really feel when you realize a fixed rate mortgage has you paying twice the amount of the price of your home when all is said and done?