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Fixed Rate Mortgages
Fixed Rate Mortgages
A Fixed Rate Mortgage (FRM) is a mortgage where the interest rate remains constant throughout the entire life of the loan. The antithesis of this would be an Adjustable Rate Mortgage (ARM), in which the interest rate varies according to market condition throughout the life of the loan. This is the most common type of mortgage in the United States as well as the most classic.
Fixed Rate Mortgages are often classified by the interest rate, interest compounding frequency, amount of the loan and the term. A popular (and quick) way to classify a Fixed Rate Mortgage is by the term of the loan (ex. 30-year Fixed Rate Mortgage, 15-year Fixed Rate Mortgage, etc.) While the most common types of Fixed Rate Mortgages have 15 and 30 year terms recent economic conditions have paved the way for the creation of 40 and 50 year terms to help families be able to afford housing payments.
Fixed Rate Mortgages are not tied to an index (unlike Adjustable Rate Mortgages). The interest rate (fully indexed rate) is set in increments of 1/4% or 1/8% and is computed by adding the current index (cost to borrow the money from federal sources) plus a margin (what the lender actually makes).
In other countries, like Canada, Fixed Rate Mortgages are less popular and handled much differently than they are in the United States. The typical term for a Fixed Rate Mortgage in Canada is ten years with an average mortgage maturity of 25 years!
Although Fixed Rate Mortgages are more widely popular than Adjustable Rate Mortgages, Fixed Rate Mortgages are actually more expensive over time. This occurs because lenders need to be rewarded for absorbing the risk of fluctuating interest rates. When they borrow the money from the federal government that, in turn, ends up as your mortgage they must pay the market rate over the life of that loan. As the market rate rises their margin decreases even though the interest rate on your mortgage remains the same.
All in all, Fixed Rate Mortgages remain a popular way to finance a home for risk sensitive consumers. The monthly payment of the mortgage will remain the same for the life of the loan (unless there is a balloon involved) but the amount of interest paid will, on average, be more of that than an Adjustable Rate Mortgage.