Fixed Rate Mortgages

The traditional fixed rate mortgage is the most common type of loan program, where monthly principal and interest payments never change during the life of the loan. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or "amortized", so that it will be completely paid off by the end of the loan term. There are also "bi-weekly" mortgages, which shorten the loan by calling for half the monthly payment every two weeks. (Since there are 52 weeks in a year, you make 26 payments, or 13 "months" worth, every year.) Interest paid on a mortgage is a function of the daily principal balance, so the more frequent payments (bi-weekly instead of the usual once-per-month) means that, for each payment made, more of that payment goes towards principal and less towards interest. The result: making bi-weekly payments will pay off a traditional 30-year mortgage in approximately 22.5 years.

Even though you have a fixed rate mortgage, your monthly payment may vary if you have an "impound account" or "escrow account". In addition to the monthly loan payment, most lenders collect additional money each month (from folks who put less than 20% cash down when purchasing their home) for the prorated monthly cost of property taxes and homeowners' insurance. The money for taxes and insurance is placed by the lender into an impound/escrow account. That money is used to pay the borrowers' property taxes and homeowners' insurance premium when they are due. If either the property tax or the insurance changes, the borrower's monthly payment will be adjusted accordingly. However, the overall payments in a fixed rate mortgage are very stable and predictable.

There are many types of fixed rate mortgages, including Conventional, FHA, VA, and USDA. Each type of program has its unique pros and cons.