Financing a home can be almost as complex as finding the right home. There’s a bewildering variety of methods to choose from. In this series, Fourteen Ways To Finance Your Home, we will explore those methods. In our first installment, we will review fixed rate loans. We will review the advantages and disadvantages of all fourteen ways.
Fixed Rate Loans
This mortgage remains the first choice of at least half of all homebuyers. It is also the least complicated, and that is why I chose to start with it.
How it works:
You get a first mortgage from a bank or credit union for 60%-80% of your purchase price (depending on the lender and your ability to make payments). The mortgage lasts anywhere from 15 to 30 years and is fully paid off at the end of the term. Each mortgage payment is the same dollar amount.
Big advantage: A fixed rate loan offers you certainty and security. You know how much you will spend on mortgage payments from now until the mortgage is paid off.
Disadvantage: You may lock yourself into a high-interest rate mortgage. The longer your mortgage runs, the higher your total bill for interest.
Money Saving Moves: Put down as much cash as possible to cut down the amount of the mortgage. If mortgage rates fall substantially during ownership, you may be able to refinance to get a new first mortgage at a lower interest rate. You can also save big money by prepaying your mortgage.
When you prepay your mortgage, you increase your mortgage payment by a few dollars each month (or as often as you would like) and apply this extra payment to the principal, not the interest. Reducing your principal regularly this way cuts years off your mortgage term and slashes thousands of dollars off your total interest bill.