Fixed rate mortgage
What do you mean by fixed rates mortgages?
Fixed rate mortgages also have prepayment penalties to provide lender a hedge against the early payment of fixed loan. The basic feature that distinguishes fixed rate mortgage from other mortgage types is the interest rate that remains fixed throughout the mortgage loan tenure. This fixed interest rate is kept is a little higher than the thirty year treasury bond so as to protect the lender against the adverse movements in the interest rates. The periodic payments on the mortgages with fixed rate comprise of both the interest and the principal and are the period is generally a month, means that the periodic payments are the monthly payments. The part of the principal is paid off every month, the interest on the principal outstanding decreases as the time remaining to maturity proceeds. This does not mean that the periodic payments decrease in amount every month, rather every next payment consists more of principal and less of the interest. The tenure of the fixed mortgages is generally long, so it is not unusual to see 30 year fixed mortgage, where the interest rates remain 30 year fixed.
Changes in interest rates and borrower’s concerns:
The borrower of the have their varying concerns with the fixed mortgage rate when the interest rates fluctuate. If the interest rates on new fixed rate home loan go up, the borrower will feel happy and satisfied as he has a cheaper source of funds, however, the lender is definitely worse off as he can lend at a higher rate in the market. To compensate for this, lenders generally charge a higher interest rate for the fixed mortgage. Conversely, if the interest rates decline, the lender feels happy as he is getting more than the market worth of the loan, but the borrower has an expensive source of funds and definitely wants to reduce his costs associated with high fixed rates. Even if the interest rates remain stable, the borrower ends up paying higher on fixed home equity rate and he is still at odds.
Costs associated with the fixed rate mortgages:
The price of the fixed rate mortgage depends on the time period for which the borrower wants to keep the rate fixed and the borrowing needs of the customer. But on a general note, if the deposits or the equity value of the collateral is high, the customer can get a lower rate and the customer can get the fixed rate for as short period of time as a few months and as long as a decade or so but the two to three years fixed rate is generally used. If you are well aware of where the interest rates are expected to move in coming years, you are in better position to choose the best fixed rate mortgage for yourself, the more you are aware, the better it is.
Important facts regarding the fixed rate mortgages:
There are several important and interesting facts about fixed rate mortgages that make these mortgages a preferred choice of a lot of people. For your convenience, some of these facts are listed as under:
- The periodic payments of the fixed rate mortgage remain the same regardless of the movements in the interest rates.
- The borrowers of fixed rate mortgage loans can get their rates fixed for a period ranging from six months to a decade or more than that.
- Fixed rate mortgages are particularly beneficial for the first time buyers because they are generally unaware of the interest rate movements.
- Fixed interest rate mortgages are well suited during the times when the interest rates show an upward moving trend.
- The interest rates that are fixed in nature are usually not as competitive as the interest rates on other types of mortgages are.
- If you are interested in convert your mortgage or change it all together before the specified period, the redemption charges associated with fixed mortgage rates can be quite high.
Benefits of fixed rate mortgage loans:
Every type of loan exists in the market because of the unique benefits it provides to the borrower. Without these important benefits, it is very difficult for these loans and their lenders to survive in highly competitive financial markets of today. Let us take a look at the benefits that fixed loan rate mortgages provide to their borrowers:
The fixed loan has an interest rate that remains fixed in all types of interest rate environments thus giving borrowers a sense of security and especially those who are risk averse.
Since the interest rates remain fixed for the fixed rate loans, the borrower need not to worry about the negative movements in the interest rates.
If the interest rates increase, the periodic payments of the borrower remain the same until the borrower chooses to refinance the loan (that will definitely not be the borrower’s choice).
The borrower has a choice to opt for large periodic payments so as to make principal return faster. This not only helps in paying off the loan early, but also reduces the interest cost of loan lower and more affordable.
Penalties for the repayment of loan:
The prepayment of fixed rate mortgage refers to returning the mortgage loan before maturity because the borrower wants to benefit from the lower interest rates environment by refinancing the loan or else his financial position has improved to the extent that he wants to eliminate his state of indebt ness (the later one is least observed). Thus, the prepayment penalties are charged by the lender to the borrower for these early payments so as to provide a hedge to the lender against the interest rate movements that can harm the lender negatively. These prepayment penalties increase the cost of switching for the borrower thus reducing the chances that the borrower will switch to a new loan and for the lender; it is the compensation against the reduced income from the mortgage loan at the lower rates. However, prepayment penalties are charged when the borrower prepay within the time specified in the loan contract.