It’s easy for a first time home buyer to get lost in translation when swimming in the sea of mortgages. Common questions of first time home buyers are “what mortgage is right for me? What are the benefits and downsides of certain mortgages? How much will I end up paying in interest payments over the long term? How much can I expect my monthly mortgage repayment to be?” If you are a first time home buyer who is simply trying to get a brief education on the most popular mortgage, a fixed rate mortgage, I’ve got you covered. Here is an in depth, yet simple to understand, review of the fixed rate mortgage.
Steady Mortgage Repayments
Fixed rate mortgages are the most popular mortgage choice amongst home buyers known to date. Fixed rate mortgages allow for borrowers to pay their mortgage repayments on a set monthly amount that will not be subject to change over the course of the mortgage repayment process. For example, if you purchase a home today under the term of a 30 year fixed rate mortgage and your current monthly mortgage repayment is $1,400 per month, twenty five years from now your monthly mortgage repayment will be the same amount.
Interest First
The most popular fixed rate mortgage term is a 30 year term. However fixed rate mortgages are available in terms as short as ten years or as long as fifty years. The mortgage repayment structures for fixed rate mortgages are designed to primarily pay down the interest payments that were paired with the initial mortgage. However attractive loan officers may have packaged fixed rate real estate auctions, their efforts fail to mask the biggest defect of this mortgage system. The defect is that borrowers end up paying the creditor far more than 100% of their loan’s principal in interest alone.
Sandra the Home Buyer
For example, let’s say Sandra purchases a home in January of 2009 and borrows $250,000 under a 30 year term and has been given an annual interest rate of 8%. At the end of the 30 year term, Sandra has paid a total of $660,387.60. Exactly how much of that money has gone towards interest payments? A total of $410,387.60 has gone towards interest payments; which is 164% of the principal. Throwing around all of these numbers is probably not the most eloquent way to get my point across. In order to minimize confusion, I’ve provided a screenshot of the example.
If you enjoy the security that a fixed rate mortgage provides, you are not alone. If you are okay with paying practically twice your home’s actual worth in interest payments alone, you are sitting by yourself in an abandoned town.
Most home buyers who fall into the trap of the fixed rate mortgage fit into one of two categories. Category A) the buyer is desperate to purchase a home and has been declined by every other mortgage application aside from a fixed rate mortgage. Category B) the buyer failed to translate the 8% interest rate per year into the accumulated interest rate over the entire loan term.
Editor’s Note: Jazmin’s example represents an extreme example assuming an 8% interest rate. Current rates are far lower for borrowers with good credit, but there are still some products on the market that look a lot the old “sub-prime” mortgages with interest rates much higher. If you can’t borrow at a more competitive rate, I would submit that you cannot afford to buy a home. As Jazmin points out – it is simply too expensive. Remember, there is no shame in renting!
Jazmin Espinal is a professional freelance writer and the owner of Capital Web Writing, a web content solution for businesses and webmasters. To contact Jazmin or to see samples of her writing, please visit CapitalWebWriting.com.