How to Understand a Fixed-Rate Mortgage

Fixed-rate mortgages can help you to purchase your dream home.
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A mortgage is a specialized, long-term loan designed for homeowners. Mortgages are offered with a variety of repayment terms and interest rate structures. Borrowers can choose a variable interest rate, which goes up and down according to economic forces, or a fixed rate, which stays the same throughout the life of the loan. Fixed-rate mortgages have unique pros and cons, and understanding these unique loans can help you to determine whether a fixed rate is best for your family.

Step 1

Examine the mortgage principal and repayment term. As the most basic concept in mortgage borrowing, the principal and term affect your analysis of more complex issues. The principal amount is the mortgage amount that you received from the lender; the repayment term is the number of years that it will take you to repay the mortgage with minimum payments, often 20 or 30 years.

Step 2

Compare the interest rate on the mortgage to other fixed- and variable-rate loans on the market. This can help you to determine whether a particular fixed-rate mortgage is best for you. If you can find a lower fixed rate, it is most likely a better option. A lower variable rate in the market, however, is not necessarily preferable. If the variable rate increases in the future, it could cost you more than the originally higher fixed rate. When analyzing current variable rates, take the loan term into consideration; the shorter the term, the more relevant current variable rates become.

Step 3

Watch fixed- and variable-rate fluctuations in the future to understand the current value of your mortgage. Fixed-rate mortgages can go up or down in value against new loans as the financial environment changes over time. In general, variable interest rates go up, in tandem with the prime rate, in times of economic prosperity. Rates tend to go down during times of economic uncertainty, as the Federal Reserve lowers the federal funds target rate to encourage lending.

Step 4

Calculate the total cost of the mortgage and the monthly payments. Mortgage loans can cost significantly more than their principal amount, depending on their interest structure and repayment term. Use an online mortgage calculator to determine exactly how much the loan will cost you throughout the repayment period, and what minimum monthly payment is necessary to repay the loan within the repayment period.

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