Fixed Rate Mortgage – Things Beginners Should Know
Fixed Rate Mortgage or FRM is the type of loan which is lent to finance the private ownership of the property with the fixed interest rate throughout the term. FRM was first introduced by Federal Housing Administration (FHA). It is one of the major types of Mortgage loans; the other major type being Adjustable Rate Mortgage (ARM). The rate of interest in ARM vary with variations in index points throughout the mortgage validity. Other kinds of mortgages are known as hybrid mortgages; the rate of interest always varies in these kinds throughout the life of loan, however in some particular time intervals, it remains constant.
In fixed rate mortgage, only the interest rate is characteristically constant; the additional charges like property taxes and insurance may or may not change.
The total amount due per month is calculated by typical elements, i.e.; rate of interest, tem of mortgage, rate of compounding interest and total loan amount. The fixed monthly payment is the amount paid by the mortgagor by the end of every month to ensure the full payment of the loan with interest by the end of the term.
Following are the characteristics of fixed rate mortgage:
The interest rate in FRM does not depend on the market index; rather it is fixed in advance to an advertised rate in the raises of 1/4 or 1/8 percent.
The interest rate for loan life is called fully indexed rate and is calculated by adding index and margin. The duration of mortgage is called ‘term’ and frequency of installments are linked with this duration as well as payment numbers.
Fixed rate mortgages are usually more expensive than ARM. As the length of the term increases in the FRM, the interest rate risk increases as well. This is the reason of fixed rate loans being bit expensive as compared to short term loans. The change between the two lengths is in the interest rates and the difference between the values is called yield curve.
The expensiveness of FRM does not imply it’s a bad option; rather the advancer is taking the risk basically. In case the index points rises, then ARM will be more expensive whereas the FRM will be constant.
In some of the countries, the prepayments are allowed without the penalty. This reduces the total amount of the loan, interest on the loan and hence will shorten the length of time needed to pay off the loan.
Often the advancer gives loan at very low rate of interest however he limits the advance payments. On prepayment in this case, the borrower will have to pay the penalty as well.
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