Conventional Fixed-Rate Mortgage - Explained
What is a Conventional Fixed-Rate Mortgage?
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Table of ContentsWhat is a Conventional Fixed Rate Mortgage?How Does a Fixed-Rate Mortgage Work?Amortized Fixed-Rate Mortgage Loans Adjustable Rate Mortgages Non-Amortizing Loans
What is a Conventional Fixed Rate Mortgage?
A fixed-rate mortgage is a type of mortgage loan whose interest rate does not change throughout the loan duration. The duration that is common for most fixed-rate mortgage is 15 years or 30 years. A fixed-rate mortgage can either be a conventional loan or a loan secured by the Federal Housing Authority, Fannie Mae or Freddie Mac. For a conventional mortgage, the loan duration is 30 years and there is a fixed interest rate for these years.
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How Does a Fixed-Rate Mortgage Work?
There are different types of loan that lenders can offer, a fixed-rate mortgage loan is one of them. When a fixed-rate mortgage loan has a fixed monthly installment payments, it is an amortized loan, this is the most common type. In a fixed-mortgage loan, both the lenders and borrowers have varying responsibilities and risks they incur. The interest rate is the major risk in a fixed-rate mortgage loan given that the interest rate might either rise or fall. When the interest rates rises, the borrower incurs lower risk while the lender incurs higher risk. When the interest rate falls also, the borrower faces a higher risk while the lender faces a lower risk.
Amortized Fixed-Rate Mortgage Loans
The most common type of fixed-rate mortgage is the amortized fixed-rate mortgage. It features a fixed interest rate during the life span of the loan and monthly installment payments. When offered by a lender, this type of loan has an amortization schedule often created when the loan is issued. In a fixed-rate mortgage, all installment payments have the same fixed interest rate, this lasts throughout the entire loan period. Furthermore, in this type of loan, at the loan draws nearest to its maturity period, the borrower pays less interest but more principal.
Adjustable Rate Mortgages
Aside from fixed-rate mortgage, lenders can also offer variable or adjustable rate mortgage loans. An adjustable rate mortgage is also issued as an amortized loan with an installment payment plan throughout the loan duration. Borrowers of adjustable rate mortgage enter the loan agreement with the hope that interest rates will decline in the future time, when interest rates fall, the interest payable will also decrease. Adjustable rate mortgage are amortized loans that have fixed - rates interest for the first few years before the interest rate becomes variable, unlike fixed-rate loans that have unchanging interest rates all through the loan period.
Generally, lenders issue fixed-rate mortgages as either amortized loans or non-amortized loans. Lenders structure mortgages given certain considerations and the terms of the loan agreement. A non-amortizing loan is commonly called an interest-only loan whereby borrowers are charged annual deferred interest. This type of mortgage is also a balloon payment loan because lenders require borrowers to make a lump sum balloon payment and thereafter pay interests only based on the loan schedule.