Popularity of the fixed rate mortgage
In the US, fixed rate mortgage loans are extremely popular. They are available for 30, 40 and even 50 year period. Of course outside US, they aren’t popular for such long term periods. For example in Canada, the fixed rate mortgage term lives are valid only for 25 years. A fixed rate mortgage loan is where the interest rate for the loan remains fixed during the term life period of the loan. This is different from mortgage loans which have floating or a variable rate of interest.
Calculation of monthly payments and interest payments on the loan
The calculation for the payment of fixed rate mortgage is decided on three factors. The loan amount, the interest rate (this is compounded yearly) and the term life of the loan. Unlike floating or adjustable mortgage loans, the rate is fixed and not tied to any index. The interest rate is based on the index plus a margin for the lenders. This will usually be the interest rate for the term of the fixed rate mortgage.
Floating interest rates vs. fixed rate interest
The interest rates for the fixed rate mortgage loans are higher than those of floating rate mortgage loans. Since there is an inherent risk involved, the lenders want to insure their investment. The yield curve on short term period loans is generally higher than those for long term period loans (many fixed mortgage loans are long term period loans).
Interest risk for the lender
Since the lender has to take an interest risk on these loans, they are priced higher as compared to the floating rate loans. A major advantage of the fixed rate mortgage loan over the floating rate mortgage loan is when the interest rates rise, the interest rates for the fixed rate mortgage loan will remain the same. This is a saving for the home owner during the times of increasing interest rates.
Prepayment of the loan
Many lenders in the US will let you make a prepayment on the loan. You can make part or full prepayment of the loan if you wish to reduce your debt burden. Sometimes there my also be a pre payment charge, since the lender is losing the interest on the debt. Please check from the lender before you apply for the loan. But it’s best to repay the fixed rate mortgage loan if the interest rates are falling. Many people would also take financing in order to repay the loans.