When it comes to choosing a mortgage, few choices offer peace of mind like a Fixed-Rate Mortgage. These loans offer both predictability and stability. For many homeowners, the simplicity of these loans make them the perfect choice in today's ever-changing economy. So what makes this type of mortgage so appealing? Here's why they can be a good fit for your home financing needs.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a home mortgage loan that offers a single rate for the entire length of a loan. Whether you choose a 15-year, 20-year, or 30-year term, your monthly principal and interest payments stay consistent over the loan's lifespan. Changes in the market won't impact your rate, making fixed-rate loans popular for many borrowers.
How Does a Fixed-Rate Mortgage Work?
Borrowers who get a fixed-rate mortgage will lock in their interest rate at the beginning of the mortgage process. Once the borrower is approved for the mortgage loan, this interest rate will stay the same for the entire loan. This means you'll pay the same principal and interest amount for every monthly mortgage payment.
Understanding a Fixed-Rate Mortgage Payment
Most fixed-rate mortgages are amortizing loans, meaning your monthly payments will cover both your principal and interest. In the first few years, most of each payment will go to paying off interest, rather than the principal.
Let's say you have a 30-year fixed-rate mortgage and your monthly payment is $2,500. When you start paying off your mortgage, $2,300 of the $2,500 payment goes toward interest. Only $200 goes toward the principal. But as you progress through the life of your loan, the payment allocation gradually shifts. At some point, you will pay an equal amount in interest and principal.
By the end of the loan's amortization schedule, you'll pay a lot more principal than interest. At some point, you will end up putting $2,300 toward the principal and $200 toward interest. Eventually you get a total reversal of how you started.