Fixed Rate Mortgage

Contrary to popular belief, a fixed interest rate is not the be all and end all of mortgage loans. In most cases, it is the least cost effective. But there are times to get one. What attracts people to these loans is that the interest rate is fixed for the life of the loan. So, if you take a 30-year fixed loan at 7%, that rate of interest will never change, and your monthly payment will not change, unless your taxes or insurance change. Fixed rate loans come in 10, 15, 20 and 30 year terms. The smaller the term, the lower the interest rate. Of course, the shorter the term, the more you'll pay each month.

For example, on a $100,000 loan, fixed for 30 years at 6%, you'll pay principal and interest of $599 per month. The same loan amount, fixed for 15 years may bear an interest rate of 5.25%. This monthly payment is $803, over $200 more monthly. Of course, you'll pay off this loan in half of the time. Many people are enamored with a shorter term loan, because they feel they'll get rid of their home loan much more quickly. This is another numbers trap, and I rarely recommend taking a shorter term.

Shorter loan terms are not a very good idea, unless you are extremely certain that the payment will fit your budget with plenty of room to spare. Consider the previous model of the 30 and 15 year loans at $100,000. Suppose you have the 15-year term, and something comes up one month and you only have $600 of the payment. The bank doesn't want less than what you owe each month, and they'll report you as a credit risk if you pay less than the full amount or if you pay late. Conversely, if you have the 30-year term, you can always double up on the payment, in order to pay your loan off sooner, but if that tough month comes around, you'll only be required to pay the $599. Always take the longer term, and add to it, if you want to pay the loan off sooner. In other words, you can create your own loan term.

Incidentally, since most of your monthly payment is interest, during the first 10 or 20 years of the loan, you'll likely write more interest off your taxes with the 30-year loan, giving you a greater advantage at tax time. Consult with your CPA about this matter.

If you're in your dream home, and you know you'll never move, and if rates are extremely low, as they were at the time of publication of this book, a fixed rate mortgage may be right for you.

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