Despite Quicken Loans making an extremely successful business out of simplifying and selling them, mortgages can be pretty confusing to those less educated on the home owning process. I know learning the intricacies of mortgages and their many variables was hard for me. It was like when they taught Koko the gorilla sign language; just like that smart primate, I had no idea there was so much more to learn about the world and I quickly became famous after I became the first of my species to learn ASL.
That last sentence didn’t make much sense, but the point I’m trying to make is not much involving mortgages makes sense for those of us new to it.
Last week I did my best of giving the simplest explanation to your mortgage questions but it was much like reading the spark notes to Game of Thrones; you’re missing out on the good bits if you don’t read the whole series. That’s why I’m back again with another Know Your Mortgage, this time (and from here out) focusing on a specific aspect of the mortgage and mortgage process. No topic is beyond your grasp! This week join me as we wrap our heads around what a fixed rate mortgage is.
Well, what’s a fixed-rate mortgage then?
A fixed-rate mortgage, fixed rate, or fixed loan (whatever you want to call it) is a mortgage loan you can take out in which the interest rate does not change for the duration of the loan.
Wait, you’re moving too fast. What’s an interest rate?
My bad, my bad. An interest rate is what a lender will charge you for securing a loan with them. So, a fixed-rate mortgage locks in the payment for what you pay regardless of economic fluctuations that may occur during the agreed time of the loan. If you’re curious to what determines the “rate” part of the “interest rate” just read the last Know Your Mortgage.
Okay, I get you now, so what’s the deal with these fixed-rate mortgages then?
Well that’s the most appealing aspect about a fixed-rate mortgage: it doesn’t change. You don’t have to speculate what the economy will be doing, you can just rely on your consistent monthly payments going out at the same time. They’re cheaper when rates are lower, and you can also take advantage of setting them up in 15 or 30 year increments.
Whoa! Whoa! 15 years? 30 years? What does this all mean!?
Don’t freak out! Fixed-rate loans are set up in terms of how many years you want the mortgage for. The two most common are 15 and 30 year rates depending on how long it will take to pay off your mortgage, how long you plan on living there, or whatever reason the home owner decides. Both have their pros and cons, so consider all the elements.
A 15 year fixed-rate loan has lower interest rates and overall bills from interest than a longer loan. It also allows your home’s equity, or value of ownership, grow at a quicker rate because you’re making larger payments on it than you would a longer loan. The downfall of the shorter loan is that your monthly payments are much higher than they would be for a longer loan.
A 30 year fixed rate loan basically has the benefits that are the opposite of a shorter, 15 year loan. You’ll have much smaller monthly payments because the loan is being paid off over a longer time, and it’s recommended for people who buy real fixer-uppers of a house because the extra cash can be used in renovations over time. The drawbacks include building your home’s equity at a much slower than you would with a shorter loan, plus the interest bill and rates will be higher.
Alright, that’s not too bad. Just have to decide between 15 and 30 years.
Well, not really.
It doesn’t have to be 15 or 30 years for a fixed-rate mortgage.
Oh come on! How many types of these things are there?
Well 15 and 30 years are by far the most common one, but technically a fixed-rate loan between 8 and 30 years can be set up with a mortgage banker as long as it is agreed upon by both parties involved. Quicken Loans has been offering this service for a while now, known as YOURgage, and it’s used to accommodate loans of whatever length for whatever reason. Say you don’t want to commit to the length of a 30 year mortgage, or want to get the payments done sooner? You can try a 22, 28 or whatever year fixed-rate mortgages (again) as long as both parties approve of it.
Rates that you can be locked into, for a mortgage of any year length, are reflections of the current market and economy. It’s hard to give any locked-in advice about it, because if you’re reading this three months, six months, one year after it was published, rates could be completely different. As always, research, research and research before making a decision. Any lingering questions about fixed-rate mortgages you still have?