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Is a Fixed-rate Mortgage the Way to Go?

A fixed-rate mortgage is the way that the great majority of people want to go with their mortgage option. Fixed-rate mortgages are stable--once you have signed the papers, they are what they are, and your monthly payment will never fluctuate throughout the life of the loan. Your interest rate is going to be the same as it was on the day you signed the loan papers until the day comes when the loan is paid off. It doesn't matter what the market is doing; your mortgage payments are going nowhere.

Most fixed-rate mortgages are backed by either "Fannie Mae" or "Freddie Mac", two quasi-federal agencies who buy loans, secure them with the full faith and credit of the U.S. government, and then re-sell them to investors. "Freddie Mac" loans carry somewhat higher interest rates and have stricter limits on their maximum amounts and a few other stipulations, but they also allow someone to get a mortgage with just 3% down against the total purchase price. "Fannie Mae" loans require very good credit to acquire and you'll need more money down, but they also carry the lowest interest rates and permit higher loan amounts.

There are, in general, two terms of fixed loans: 30-year and 15-year. Some lenders have offered 40-year fixed, and it's also possible to get 20-year fixed mortgages, but both of these loan terms are unusual. Each one of these traditional fixed-rate mortgages offers something advantageous and something disadvantageous. It really depends on your personal situation and your "debt tolerance" which one you choose. With a 30-year fixed-rate mortgage, you are going to get yourself some relatively low monthly payments (especially if you pay a "point" or two up front to lower the interest rate; a "point" is 1% of the total loan amount). If you have very good credit, monthly payments don't go lower for fixed-rate. On the other hand, you have a very long time to be obligated to pay off this debt. With 15-year fixed-rate mortgages, you can get even a slightly lower interest rate, but because you have to pay off the principal much sooner, your monthly payments will be higher. On the other hand, your lifetime total payments to your mortgage will be lower than they will be with the 30-year note. Is it more important to you to save money short-term, or long-term?

You can also save yet more money with these loans by making bi-monthly payments. This is where you take the total monthly payment, cut it in half, and then make that half-payment every two weeks. Now, why would this make a difference? It's because the interest payments accrue by the day. If you pay early, you are paying less in interest payments and more against the principal--and, so, the loan gets paid off early, saving you many thousands of dollars. A 30-year mortgage paid this way gets paid off in about 22 years, and a 15-year gets paid off in about 12 years. Not only do you save much money, but you also get closer to being totally debt-free sooner.

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