A fixed-rate mortgage has an interest rate that stays the same for the entire loan term. Your principal and interest payment never changes, making it easier to budget.
With a fixed-rate mortgage, the interest rate you lock in at closing is the rate you pay for the life of the loan. Whether rates in the broader market go up or down, your rate and your principal-and-interest payment remain constant. The most common terms are 15 and 30 years.
A 30-year fixed mortgage offers the lowest monthly payment but costs more in total interest over the life of the loan. A 15-year fixed has higher monthly payments but a lower interest rate and far less total interest paid. For example, on a $300,000 loan, a 30-year term at 7% costs about $418,000 in interest, while a 15-year term at 6.5% costs about $164,000.
Fixed-rate mortgages are the most popular choice in the United States because of their predictability. They are especially attractive when interest rates are low, as you lock in that low rate permanently. If rates drop significantly after you get your mortgage, you can always refinance to capture the lower rate.
An adjustable-rate mortgage has an interest rate that changes periodically based on a market index. ARMs typically start with a lower fixed rate for an introductory period, then adjust up or down.
AmortizationAmortization is the process of spreading a loan into equal monthly payments over time. Each payment covers both interest and a portion of the principal balance.
RefinanceRefinancing means replacing your current mortgage with a new loan, typically to get a lower interest rate, change the loan term, or access your home equity through a cash-out refinance.
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