Home Investing How Does Fixed Rate Mortgage Work?

How Does Fixed Rate Mortgage Work?

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How Does Fixed Rate Mortgage Work?
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Mortgages can be a bit puzzling, like a maze. There are two main types: fixed-rate and adjustable-rate mortgages (ARMs). Fixed-rate mortgages may cost more upfront, but they’re like a reliable friend – their interest rate stays the same throughout the time you pay back the loan. On the other hand, ARMs are a bit unpredictable, with interest rates that can change based on the market.

Let’s dig into fixed-rate mortgages. They’re a kind of home loan where the interest rate doesn’t change over time. This means your monthly payments for both the house and interest won’t go up or down.

People usually prefer fixed-rate mortgages because they’re steady. ARMs can be a gamble because the interest rate can go up and down, making payments uncertain.

Here’s the deal: with a fixed-rate mortgage, the interest rate is set when you’re approved for the loan. They look at your credit score, how long the loan will last, how much you’re putting down, and other stuff.

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Picture your interest rate as the main character in a story. It never changes, unlike an ARM’s interest rate that’s like a character dancing to the market’s tune.

There are different kinds of fixed-rate mortgages:

  1. Conventional loans: These are regular mortgages, not backed by the government. They’re common but don’t have the perks of government-backed loans.
  2. FHA loans: The government’s involved here. They’re good if you have a small down payment and don’t want too many hoops to jump through.
  3. USDA loans: The government helps low-income folks buy homes in rural areas.
  4. VA loans: If you’re a military member or their family, this one’s for you.

Lenders might also have special deals for first-time buyers or those with not-so-great credit.

There’s more to understand:

  • APR: It’s like a yearly fee for borrowing money. It includes interest and extra charges.
  • Amortization: This is how you pay off the loan. More of your early payments go to interest, but later on, they tackle the loan amount.
  • Closing costs: These are extra fees when you get a loan, like the origination fee or appraisal cost.
  • Down payment: This is what you pay upfront. Some loans need more, some need less.
  • Equity: It’s the difference between your home’s value and how much you owe.
  • Escrow: It’s like a savings account for home expenses, but your main payment stays the same.
  • Fixed interest rate: The interest rate doesn’t change.
  • PITI: It stands for the main parts of your mortgage payment – the house, interest, taxes, and insurance.
  • PMI: If you put less than 20% down, you might pay this extra insurance fee.
  • Repayment term: It’s how long you have to pay off the loan. Most fixed-rate mortgages last 30 years.
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So, there you have it! Fixed-rate mortgages are like a reliable ship in the stormy sea of loans. They’re steady, and now you know all the pieces that come with them.