What is a fixed rate mortgage?

The most commonly used type of home loan is a fixed rate mortgage (FRM). When you obtain a mortgage at a fixed rate, that means that throughout the life of your loan you will pay the same interest rate regardless of whether the market mortgage rate goes up or down, and your monthly payments will remain the same throughout the life of your loan because it is “amortized or structured that way. Most home purchases using a fixed rate mortgage are on a 30 year repayment term. There are other repayment lengths for a fixed rate loan, including 25, 20, 15 and 10 years. The most common repayment term for a refinance is a 15 year FRM. Another option is a bi-weekly mortgage, which will reduce the length of the loan by making half of the monthly payment on a 2 week schedule. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.)

The only exception to a fixed rate mortgage having non-variable monthly payments is if you have an “impound account.” This is when your lender collects additional funds each month for the prorated monthly cost of homeowners insurance and property tax. This is generally done when a borrower pays less than 20% down on their home purchase. The impound account is used to pay these expenses when they are due and if the premium and tax changes, so does the amount collected by the lender each month.

Fixed rate vs. adjustable rate

An adjustable rate mortgage can widely vary your monthly mortgage payments based on how the market is and the overall interest rate fluctuations. A fixed rate mortgage is often considered much more stable and in most cases is a better choice. An adjustable rate mortgage can be very attractive when rates are low to start out, however if rates increase after the initial period of the loan, monthly payments will increase, so an adjustable rate  mortgage should only be considered by those who expect an increase in income availability.

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