Fixed Rate Mortgage
Get the facts on fixed mortgages
A mortgage with a fixed interest rate is attractive to many homeowners because it makes financial planning secure and easy. Mortgages with floating or variable rates are subject to significant fluctuations. While dips in interest rates can save you money, increases can extend your amortization period and cost you a hefty chunk of change. With a fixed rate mortgage, you avoid these uncertainties altogether.
How a Fixed Rate Mortgage Works
Mortgages with a fixed interest rate are usually calculated at a higher annual percentage rate (APR) than their variable rate mortgage cousins. However, don't be fooled by the smoke and mirrors — fixed rate mortgages offer a lot more security, especially over longer terms.
To get the cheapest fixed rate mortgage, you need to look closely at how frequently the outstanding interest is calculated, whether there are any penalties for faster-than-expected repayment and what kind of upfront fees and closing costs are charged. Interest calculated on a monthly or quarterly basis will add up faster than interest charged annually.
Also, some lenders allow you to increase the amount of your mortgage payments by up to 100 percent without penalty, while others will charge you extra fees if you try to pay off your mortgage faster. If you anticipate being in a position to increase the amount of your monthly payments, choose a lender that won't penalize you for doing so. If the fixed interest rate is higher with a lender who won't penalize you for paying off your mortgage faster, you'll have to do some fairly complex calculations to see which will save you the most money in the long run.
Choose the Right Fixed Mortgage Term
Most lenders vary the fixed interest rate they offer according to the length of your mortgage term. Mortgages with shorter terms tend to come with lower interest rates; for example, a 10-year fixed rate mortgage might have an annual percentage rate (APR) of 6.5 percent, whereas a 30-year fixed rate mortgage from the same lender might have an APR of 7.25 percent.
Lenders do this because they want to reward homeowners who will pay off their mortgages faster; the faster the homeowner pays off the house, the faster the lender recovers the loan they gave the homeowner to buy the house in the first place.
You'll save yourself a lot of money — thousands or even tens of thousands of dollars — by paying off your mortgage faster. It's always wise to select the shortest fixed rate mortgage term you can possibly afford.