Mortgage Mavin Find the best mortgage

Fixed-Rate Mortgages

In this lesson, we focus on the most common type of mortgage - the fixed-rate mortgage.

Fixed-Rate Mortgage

A traditional fixed-rate mortgage has the following attributes:

  • The interest rate remains the same (i.e., fixed) during the life of the loan.
  • The borrower makes 12 payments each year - one per month.
  • Monthly payments are constant during the life of the loan.
  • A portion of each monthly payment covers interest expense, and a portion covers principal.

The most common fixed-rate mortgages are 15-year and 30-year mortgages, but you may be able to negotiate a loan for any duration. A shorter-term loan has advantages over a longer-term loan: the loan is paid off quicker, the interest cost is reduced, and interest rates are often lower. The main disadvantage of a shorter-term loan is a higher monthly loan payment.

Variations on the Fixed-Rate Mortgage

The traditional fixed-rate mortgage is not the only type of fixed-rate mortgage. Here are some other versions of the fixed-rate mortgage that you might want to consider.

  • Biweekly fixed-rate loans. A biweekly mortgage requires payments every two weeks instead of once a month. You can structure your biweekly mortgage so that each biweekly payment equals half the monthly payment for a traditional fixed-rate loan. When you do this, you make the equivalent of 13 monthly payments each year; but you lower your interest expense and pay the loan off quicker. The "extra" payment makes it possible to pay off a 30-year mortgage in 18 to 20 years,
Tip If you have a traditional fixed-rate mortgage, you can obtain substantially all of the benefits of the above "biweekly" strategy, simply by making an "extra" mortgage payment (called a prepayment) each year.

Use the free mortgage calculator to discover how much quicker you can pay off your mortgage and how much you can save by making an extra mortgage payment. The prepayment case study shows how.
  • Balloon loans. A balloon loan is a type of short-term loan. Initially, it works like a traditional fixed-rate mortgage, requiring regular monthly payments of principal and interest. Then, after a period of time (usually between 3 to 10 years), it becomes 100% due. At that time, the borrower must pay the loan off in cash (referred to as the balloon payment) or refinance. Usually, the interest rate on a balloon loan is lower than the interest rate on a traditional, fixed-rate mortgage.

  • Interest-only mortgages. An interest-only mortgage allows the borrower to pay only interest on the loan for a set period of time. At the end of that time, the borrower may renew the interest-only mortgage (usually at the option of the lender), repay the principle, or (under some arrangements) change the loan to a traditional fixed-rate mortgage.