What is a fixed-rate mortgage
A fixed-rate mortgage is a type of mortgage that has a fixed interest rate fo the entire term of the mortgage/loan. The main benefit of fixed-rate mortgages is that a borrower will not have to worry about possible fluctuations with ever-changing interest rates.
Fixed mortgage market
When selecting your potential future fixed mortgage, borrowers are often confused about the rate as the market is changing very fast we just can not keep track of it. When we talk about really long-term loans, the most popular type of financing is a 20 year fixed mortgage and you can obtain it from various financial institutions.
Fixed mortgage characteristics
If you would compare 20 years fixed mortgage to other types of loans, you would see that in this case, the word fixed means the mortgage has fixed interest rate throughout the whole duration of the mortgage. To be more precise, once a payment plan has been established and your mortgage is granted, you can be sure you will pay the same amount of interest for 20 years.
Furthermore, your payment will primarily go towards paying interest during the first few years of the mortgage. In the end, you will not pay principle until much later in your payment term.
20 year fixed mortgage rates
Take this as an example, let’s say you have two mortgages. One is a 20 year and the other one is a 30 year fixed mortgage. Typically, the longer the mortgage, the higher is your interest rate. Right now, a 30 year fixed mortgage is available from around 3.83% and a 20 year fixed mortgage is available from 3.27%. You can get even try to get a 15 year fixed mortgage that has an interest rate of around 2.95%.
These rates usually fluctuate very often, but they all follow the same pattern. The pattern is the following: longer mortgage, higher interest rate. In other words, the length of your mortgage is proportional to the length of your interest rate.
There is a quite simple and logical reasoning behind it. The lender (your local bank in most cases) will collect more revenue in this case. In the end, the bank cares about the profit they make off you. If you choose a shorter option, like some short-term personal loan, you could save thousands of dollars.
Moreover, there is one big disadvantage for the borrower. If you obtain for a 20 year fixed mortgage, you will most likely run into some financial problem trying to repay a 20 year mortgage.
So, to recap all the important features of a 20 year fixed mortgages:
- Your payments are consistent for full payment term of 20 years because of a fixed interest rate.
- Payments for the principle may increase rapidly than a long term loan.
- Although the interest rate fluctuates depending on the market, you can expect something between a 15 and 30 years fixed mortgage.
When should I apply for a fixed mortgage?
This is a tough question to answer if I do not know your exact financial situation. Since market rates for a fixed mortgage fluctuate on a practically weekly basis, you should look out for trends in the market, global economic and market trends and other factors. In a few words, it is a complex job to follow everything and it is easy to get lost in millions of numbers. There are special teams in banks who do this as their jobs and they try to predict the future market rates, which is almost impossible.
For example, if you country is experiencing an inflationary period, interest rates can skyrocket on the sole discretion of your financial institution. Typically, this is the characteristic of a variable loan. So, if you believe you can refinance the loan or even pay it off before an inflationary period, go for it.
On the other hand, here you are, with a 20 year fixed mortgage. You are protected from an inflation and the possible rise of interest rate since you agreed upon a fixed mortgage with your bank. This type of mortgage is a good choice for people who want relatively low risk and they can pay the loan without any potential problems. But, it is relatively hard to apply for that type of loan and they usually require a good credit score.
Now, the answer you have been all waiting for. It is quite obvious actually. The ideal time to take a 20 year fixed mortgage is when the interest rates are the lowest. Of course, getting that prime low-interest rate is hard to guess and in this case, you should talk to a certified financial advisor. He or she will offer you the best advice there is for a certain fee.
Mortgage fees and costs
If you are going to get a loan, you should know there are some upfront costs and fees. Usually, the fees and costs are for processing the loan and to write a proper mortgage policy.
However, there are times when a mortgage upfront costs and fees can be very low of even nonexistent. This is usually during times when the money is highly fluid and we are experiencing an economic upturn.
Usually, these upfront fees vary depending on the bank, loan amount, etc. but you should expect up to 1% o the full loan amount.
Some of the possible fees are:
Loan origination fee
When bank drafts up a mortgage policy, these all represent costs for the bank. In this case, you can expect to pay for loan processing and administration.
Credit rating report fee
If you want a mortgage, your bank has to go through your credit history and they have to it to the last detail. Usually, there is a cost when obtaining and analyzing these reports.
If you ar borrowing for the first time, you may want to set aside some extra cash to pay for the gap between the time loan is granted and the first payment due date.