Typical Fixed-Rate Loans
Like any category of mortgages, the various choices within the fixed-rate family have different pros and cons. The following sections provide a quick overview of the various fixed-rate products available in the marketplace.
The following examples involve a small loan with 20 percent down payment and so do not involve payment of private mortgage insurance (PMI). The examples are intended to give an idea of how various payment terms affect the amount a borrower pays each month.
Over a 360-month term at the stated rate, borrowers pay exactly the same amount each month unless they refinance. Let's say a borrower takes out a $100,000 thirty-year fixed loan on a home appraised at $125,000 at a rate of 6.5 percent with yearly property taxes of $2,000 and insurance of $200. The total monthly payment is $815 (including principal and interest of $632 and taxes and insurance of $183).
What's a hybrid?
Discussed in Chapter 14, hybrids are actually a mixture of fixed-rate and adjustable-rate loan features. Essentially, these are loans with a longer period of time (three to ten years) during which your loan acts like a fixedrate loan, but at the end of that period it will adjust based on what its caps allow. People who plan to stay in their own homes a long time might want to go with a plain-vanilla fixed-rate loan.
Over a 240-month term at the stated rate, borrowers pay exactly the same amount each month unless they refinance. Since the payment time is compressed, a twenty-year loan will cost more each month to pay, but mortgages that don't have a prepayment restriction allow borrowers to lower their interest costs by making additional monthly payments on the loan. Any fixed-rate product can be refinanced in case borrowers want to change the term or lower their rate.
Let's say a borrower takes out a $100,000 twenty-year fixed loan on a home appraised at $125,000 at a rate of 6.5 percent with yearly property taxes of $2,000 and insurance of $200. The total monthly payment is $929 (including principal and interest of $746 and taxes and insurance of $183).
A fixed-rate loan shouldn't mean a fixed rate for life. If rates fall, consult on whether it makes good sense for you to refinance. Chapter 20 discusses this option in depth, but it always makes sense to compare your current loan on a regular basis and consult with your financial advisor on the best way to refinance if it's time.
Over a 180-month term at the stated rate, borrowers pay exactly the same amount each month unless they refinance. Since the payment time is compressed, a fifteen-year loan costs more each month to pay, but mortgages that don't have a prepayment restriction allow borrowers to lower their interest costs by making additional monthly payments on the loan. Any fixed-rate product can be refinanced in case borrowers want to change the term or lower their rate.
Let's say a borrower takes out a $100,000 fifteen-year fixed loan on a home appraised at $125,000 at a rate of 6.5 percent with yearly property taxes of $2,000 and insurance of $200. The total monthly payment is $1,054 (including principal and interest of $871 and taxes and insurance of $183).
You need to determine whether paying closing costs is worth it. Take your closing cost figure, and divide it by your total loan amount. Then increase the amount of your loan by a quarter-percent and get a figure for the new monthly payment. Would it really be that much higher than the time it would take to recoup those closing costs? That's the critical issue.
Over a 120-month term at the stated rate, borrowers pay exactly the same amount each month unless they refinance. Since the payment time is compressed, a ten-year loan will cost more each month to pay, but mortgages that don't have a prepayment restriction allow borrowers to lower their interest costs by making additional monthly payments on the loan. Any fixed-rate product can be refinanced in case borrowers want to change the term or lower their rate.
Just because you're signing on for a conventional fixed-rate loan product doesn't mean you shouldn't ask the question about prepayment and refinancing penalties. Always ask a lender if it's okay to prepay and refinance, no matter who the lender is and what loan you're getting.
Let's say a borrower takes out a $100,000 ten-year fixed loan on a home appraised at $125,000 at a rate of 6.5 percent with yearly property taxes of $2,000 and insurance of $200. The total monthly payment is $1,319 (including principal and interest of $1,135 and taxes and insurance of $183).
A longer-term fixed rate loan takes significantly longer to build equity and pay off, but for some borrowers in high-cost neighborhoods, they're being looked at as a way to buy a home with an affordable payment.
Let's say a borrower takes out a $100,000 forty-year fixed loan on a home appraised at $125,000 at a rate of 6.5 percent with yearly property taxes of $2,000 and insurance of $200. Total monthly payment: $769 (including principal and interest of $585 and taxes and insurance of $183).
