What is a fixed rate mortgage?
A fixed rate mortgage is a mortgage loan where the interest rate on the mortgage note remains the same through the life of the loan. Other forms of mortgage loans with fixed interest terms include; interest only mortgage loans, graduated payment mortgages, negative amortization mortgages and balloon mortgages. Each of the mortgage loan types above have a period of which a fixed rate term applies. A Balloon Payment mortgage will have a fixed rate for the term of the loan for which a fixed rate payment may apply, but it is followed by the ending balloon payment. On fixed rate loans the principal and interest on the mortgage loan will remain the same.
Fixed Rate Mortgages are characterized by the interest rate which includes compounding frequency of the amount of the mortgage loan and the term of mortgage loan.
There are other programs where the interest rate is fixed for the life of the loan or known at the time of closing. These programs are:
Interest Only Mortgage: The mortgage note has a stated interest rate for a specific term where the borrower pays just the interest portion of the mortgage loan payment. After the interest only payment period is over the loan becomes fully amortizing for the remaining term. The interest only period is usually the first 5, 7, or 10 years of the mortgage loan.
Graduated Payment Mortgage: Are mortgage loans where the fixed interest rates are known on the mortgage loan at the time of loan closing. But the first year is generally 2% to 3% lower than the fully amortized fixed rate mortgage loan interest rate. During the first five years the mortgage payments will increased by 5% depending on the graduated payment plan selected.
Temporary Buy-down: This is a loan program that requires funds be placed in a buy down fund. The borrowers generally take one of the two choices either the 3, 2, 1 or 2, 1 option. For example, when borrower takes the 3, 2, 1 option the interest paid for the first three years of the mortgage loan term is paid at an interest rate of 3% lower than the mortgage note rate for year one, 2% lower for year two and 1% lower than the note rate for year three. The difference in funds owed is put in a buy down fund. During the first thirty six months of the mortgage loan the borrower makes payments and the buy-down fund pays the difference in the mortgage payment.