Excel Mortgage Group
Fixed-rate Mortgage

What advantages does a Fixed-rate loan have?


A long-term, fixed-rate real estate loan is repaid over a 15 to 30 year term at an unchanging monthly payment and interest rate.

Before the late 1970's, the majority of all real estate loans involved long-term, fixed-rate repayment plans.  In fact, it has been the loan program of choice since the Great Depression.  However, it is not favored by real estate lenders during times of high or volatile interest rates due to its slow payback of the principle amount of the loan and its inability to keep pace with inflation.

A fixed-rate loan having an 8% interest will yield an 8% return throughout its term (up to 30 years) regardless of what happens to the cost of money during those 30 years.  While interest rates are volatile and subject to a significant change over the short term, lenders feel the need to protect themselves by committing their loan funds for shorter terms (such as a 10 or 15 year loan).  Another solution would be for the lenders to offer Adjustable Rate Mortgages (ARM's).

A long-term fully amortized loan has distinct advantages for the borrower.  The equal payments are spread out over a long period of time keeping the payments manageable and there is no balloon payment required at the end of the loan term.  This type of loan is the most popular with borrowers mostly because this is the type of loan program that they are most familiar with.

The 15-year, fixed-rate loan is becoming increasingly more popular every year.  They often have a lower interest rate, ownership in half the time of a 30-year fixed loan, and fantastic savings over the life of the loan.
The two major disadvantages of a 15-year fixed-rate loan are larger monthly payments, and smaller tax deductions.
The advantages and disadvantages of a 30-year fixed-rate loan are the opposite of the explanations for a 15-year fixed-rate loan.

Generally, a 15 or 30-year fixed-rate fully amortized loan is what most homeowners shoot for until the rates rise to around 8%-9%.  At this point the advantages dim in the light of other popular programs such as 2 to 1 buydowns, and Adjustable Rate Mortgages (Arm's).


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