A fixed-rate mortgage is a property loan with an interest rate that remains constant throughout the loan’s term, ensuring stable and predictable monthly payments for the borrower. As a real estate agent, your clients will depend on you to explain common real estate terms. Here’s how to explain “What is a fixed-rate mortgage?” to your buyer client.
We’ll explain how fixed-rate mortgages work and provide examples. Then, we will discuss their advantages and disadvantages and explain the different types.
How Fixed Rate Mortgages Work — with Examples
Obtaining a mortgage requires a series of steps, during which buyers provide the necessary identification and financial documentation and complete substantial paperwork. The process can be overwhelming, especially for new buyers.
Explain to your buyer clients before they start the process that they have options when securing a loan for a home. A fixed-rate mortgage is one of those options. Here’s how it works.
Let’s say your client needs to obtain a $300,000 mortgage after putting 20% down. They choose a 30-year fixed-rate mortgage at an interest rate of 6.92%. Their monthly payment is calculated to cover both the principal (the amount of the loan—$300,000) and interest.
Here’s a breakdown:
Loan Amount: $300,000
Interest Rate: 6.92%
Term: 30 years (360 months)
Monthly Payment: $1,980
(Make sure your client understands that they will also have to pay a portion of their property taxes and homeowners insurance premiums each month.)
This monthly payment stays the same for 30 years, making it easy for your client to budget and plan their finances.
Related Article: Homeowner’s Loan Guide: 7 Types of Mortgage Home Loans.
What Are The Differences Between Fixed-Rate and Adjustable Rate Mortgages (ARMs)?
Before we discuss the advantages and disadvantages of fixed-rate mortgages, it’s helpful to learn about one of the other options. Fixed-rate mortgages are typically compared to adjustable-rate mortgages, often called ARMs. An ARM is a mortgage loan with an interest rate that can change periodically. Initially, ARMs offer lower interest rates and payments than fixed-rate mortgages, making them attractive for buyers who expect to move or refinance before the adjustable period begins. While there are benefits to ARMs, they carry the risk of higher payments in the future if the interest rates rise.
Advantages of Fixed Rate Mortgages
As we mentioned – your client will have to decide what type of mortgage works best for them. Here are some of the reasons they may choose a fixed-rate mortgage.
1. Predictable payments
With a fixed-rate mortgage, a homeowner’s monthly principal and interest payments remain unchanged throughout the loan term. This consistency makes it easier to budget and manage household finances, as they know exactly how much they must allocate each month to their mortgage.
2. Protection against interest rate increases
Many of your clients will have seen recent news articles about “high” interest rates affecting the real estate market. Yes, interest rates have fluctuated over time, and a fixed-rate mortgage would shield borrowers from the market’s volatility. A fixed-rate mortgage can be particularly beneficial in a rising interest rate environment, as the borrower is locked into a lower rate compared to what might be available in the future.
3. Simplicity and transparency
Many prefer the simplicity of a fixed-rate mortgage. They can easily understand their payment schedules and how much of their payment goes toward principal versus interest over time.
4. Long-term financial planning
Knowing how much one pays for housing makes budgeting and planning for the future easier. This stability is particularly valuable for individuals with fixed incomes or those planning to stay in their homes for many years.
5. Potential savings over time
The mortgage payment is determined by how much is borrowed and the interest rate. Locking in a lower interest rate will enable borrowers to free up more of their income to put in savings or make additional payments against the loan’s principal.
Considerations Before Choosing a Fixed-Rate Mortgage
Are fixed-rate mortgages always the best option? Here are some things your client needs to consider before choosing this option.
1. Higher initial interest rates
Fixed-rate mortgages sometimes have higher interest rates than adjustable-rate mortgages. This can result in higher monthly payments—at least initially. So, fixed-rate mortgages can be a disadvantage for borrowers looking for the lowest possible payments in the short term.
2. Less flexibility
Interest rates fluctuate. If interest rates drop, those with fixed-rate mortgages won’t benefit – unless they refinance their loan. This involves additional costs and paperwork, and there is no guarantee that they will qualify for a better rate.
3. Potential cost over time
A fixed-rate mortgage may cost more in interest over time than an adjustable-rate mortgage. Unfortunately, you cannot know for sure—unless you are a fortune teller.
4. Higher monthly payments
Fixed-rate mortgages often have higher initial rates than adjustable-rate mortgages, which can result in higher monthly payments—at least initially.
5. Risk of opportunity cost
The higher initial payments might limit a borrower’s ability to invest or spend money elsewhere. This opportunity cost could mean missing out on potential investments or other financial opportunities that could provide a higher return.
Types of Fixed Rate Mortgages
Here are the most fixed-rate mortgage options your buyer may consider.
1. 30-Year Fixed-Rate Mortgage (FRM):
30-year fixed-rate mortgages (FRM) have a consistent Interest rate and payments for 30 years until the loan is paid in full.
2. 15-Year Fixed-Rate Mortgage (FRM):
15-year fixed-rate mortgages (FRM) have a consistent Interest rate and payments for 15 years until the loan is paid in full.
3. 20-Year Fixed-Rate Mortgage (FRM):
20-year fixed-rate mortgages (FRM) have a consistent interest rate and payments for 20 years until the loan is paid in full.
4. Bi-weekly Fixed-Rate Mortgage:
With a bi-weekly fixed-rate mortgage plan, payments are made every two weeks instead of monthly.
5. Balloon Fixed-Rate Mortgage:
Balloon fixed-rate mortgages have a constant interest rate and lower monthly payments for 5-7 years, after which the remaining balance is due in a lump sum.
6. Fixed-Rate Jumbo Mortgage:
Fixed-rate jumbo mortgages are typically for high-value properties.
Considerations When Choosing Between Mortgage Types
Your client may ask for your advice when selecting a mortgage product. Encourage your clients to answer the following questions to guide their decision.
- What is my financial situation, including my current income and employment stability?
- What are my long-term plans? How long do I plan to stay in the home?
- Am I comfortable with the possibility of monthly payments increasing in the future, or do I prefer the stability of fixed monthly payments?
- What is the current interest rate environment?
- What is my credit score?
Related Article: How to Choose a Mortgage: 6 Tips to Get the Best Loan (For Your Clients)
Real estate agents must be able to present the facts regarding fixed-rate mortgages. One benefit of taking your real estate pre-licensing courses with Colibri Real Estate School is that you will receive clear explanations of all key real estate terms and processes. This will give you a deep understanding of the industry so that you can best serve your clients.
Start the licensing process today to become a real estate agent in your state.
Key Takeaways
- A fixed-rate mortgage ensures the interest rate remains constant throughout the loan term, leading to predictable and stable monthly payments. This helps borrowers budget and manage their finances effectively.
- Fixed-rate mortgages protect borrowers from potential interest rate increases in the market.
- Fixed-rate mortgages often come with higher initial interest rates than adjustable-rate mortgages (ARMs). This can result in higher initial monthly payments, which may not be ideal for borrowers seeking lower payments in the short term.
- Borrowers with fixed-rate mortgages only benefit from falling interest rates if they refinance, which can involve additional costs and paperwork.
