Fixed-Rate Mortgages

Fixed-rate mortgages are the most common mortgage for first-time homebuyers because they're stable. Typically the monthly mortgage payment remains the same for the entire term of the loan – whether it's a 15-year, 20-year, 30-year, or 40-year mortgage – allowing for predictability in your monthly housing costs.

What are the benefits of a fixed-rate mortgage?

• Inflation protection.
  If interest rates increase, your mortgage and your mortgage payment won't be affected. This is especially helpful if you plan to own your home for 5 or more years.

• Long-term planning.
  You know what your monthly mortgage expense will be for the entire term of your mortgage. This can help you plan for other expenses and long-term goals.

• Low risk.
  You always know what your mortgage payment will be, regardless of the current interest rate. This is why fixed-rate mortgages are so popular with first-time buyers.

There are additional considerations to be aware of with fixed-rate mortgages:

• Your mortgage interest rate won't go down, even if interest rates drop, unless you refinance your mortgage.

• Because the interest rate may be higher than other types of loans such as adjustable-rate mortgages, you may not be able to qualify for as large a loan with a fixed-rate mortgage.

• While your actual mortgage payment will not change, your total monthly payment can occasionally increase based on changes to your taxes and insurance. In many cases you can choose to pay these costs as part of your monthly payment through an escrow account that your lender keeps for you.

Interest-Only, Fixed-Rate Mortgages

If you choose an interest-only option for a fixed-rate mortgage, the term of the loan is divided into two periods. During the first period, your monthly payment is lower because you pay only interest and no principal. In the second period, you pay both. For example, on a 30-year fixed rate mortgage, you might make interest-only payments for the first 10 years, and then pay both principal and interest for the remaining 20 years. The actual principal of the loan (the amount you borrowed) will be paid off in the second period.

While interest-only loans can free up cash for other purposes during the initial period of the loan, you should remember that during the interest-only portion you will not be reducing the principal amount you owe. When you begin paying both principal and interest in the second period of the mortgage your monthly payments will be significantly larger.

As with all interest-only mortgages, interest-only, fixed-rate mortgages are not for all borrowers, and should be offered appropriately only to borrowers who:

• Clearly understand that their payments will significantly increase when principal and interest payments begin.

• Qualify for this type of mortgage.

• Are able to make payments at the fully amortized rate (the second period of the mortgage).

Other Fixed-Rate Mortgages

Biweekly mortgages are mortgages that set up the payment differently. Instead of paying your mortgage once a month, you pay half the monthly mortgage payment every two weeks – which equates to 26 payments a year. A biweekly mortgage allows you to pay off your mortgage faster because you are making the equivalent of one extra monthly payment every year of the loan.

Biweekly mortgages are not offered by every lender and are not for every borrower; and they do require discipline since an additional payment is made every month.

Note that after you begin paying on your loan, some lenders will offer you, for a fee, the option of changing to a biweekly mortgage or some other payment schedule advertising that it will ultimately save you money in interest payments. Be aware that most mortgages allow you to make additional payments of principal at any time (and save the same amount over the life of the mortgage) without having to pay a fee for the service of paying on a different schedule.