What You Need to Know About Fixed Rate Mortgages

Kristie Lorette

When you're buying your first home, establishing the mortgage financing can be a dizzying experience. Fixed rate mortgages seem to many like the best option, but mortgage financing is not a one-size-fits-all financial decision. Before you make a decision either way, find out what you need to know about fixed rate mortgages. Then, make a decision as to whether it's the right financing option for you. 

Same Mortgage Payments

Fixed rate mortgages offer a sense of comfort to most homebuyers because borrowers know the interest rate and monthly mortgage payments stay the same month after month. For example, if you purchase a home today using a 30 year fixed rate mortgage and your monthly mortgage payment is $1,200, you know that for the next 30 years your mortgage payment is going to be $1,200 (if you even have the mortgage for the next 30 years).

Interest vs. Principal

One of the biggest downsides of a fixed rate mortgage is that the majority of the monthly mortgage payment is made up of interest - interest that you are paying to the lender, meaning you end up paying far more than 100% of the principal balance of the mortgage in the form of interest. A borrower doesn't really start to chip away at the principal portion of a fixed rate mortgage until about the halfway point. For a 30 year fixed mortgage, this means you're not reducing a significant portion of your principal balance until about 15 years into it and for a 15 year mortgage, principal reduction starts at about the seven and a half year mark. 

There is no doubt that the fixed rate mortgage offers a sense of safety and security to borrowers. On the other hand, how secure can you really feel when you realize a fixed rate mortgage has you paying twice the amount of the price of your home when all is said and done?

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About the Author

Kristie Lorette is a freelance writer and marketing consultant that specializes in personal finance. She is also the editor of The Mortgage & Credit Diva, a blog devoted to mortgage and personal finance tips, tricks, and advice for consumers. You can read Kristie's blog at www.mortgageandcreditdiva.blogspot.com or learn more about her writing and marketing services at www.studiokwriting.com.

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