Fixed Rate Mortgage Information

     A traditional mortgage, under a fixed rate mortgage the interest rate, interest and principal payments are constant throughout the entire term of the mortgage. At origination the rate of the mortgage for the entire term is fixed thus allowing the consumer considerable predictability in their payments for the entire life of the loan. Fixed rate mortgages are the most common type of mortgage in the United States with many Americans preferring the predictability of the fixed monthly payment to that of a shifting payment. The risk for the consumer in a fixed rate mortgage is minimal. In the event that after the fixed rate is established, interest rates move in the favor the consumer, that is they fall, the consumer need only refinance for a small upfront cost (if any) to take advantage of the lower rates. In the event that interest rates rise, the fixed rate protects the consumer and essentially allows them to borrow at below market rates during that period of time. The risk for a financial institution in a fixed rate mortgage is relatively large. While the risk of loss on mortgages is generally minimal, financial institutions do have interest rate risk, or the lost opportunity that interest rates will rise while their funds are invested in lower interest rate mortgages, thus earning them a lower return and causing the value of their loan portfolio to fall at market. Historically, banks have overcome this issue in two very different manners, firstly many banks have elected to enter the loan origination business, choosing to collect fees for originating their loans and then immediately resell their portfolios in the secondary market, thus eliminating the chance of interest rate risk. While this means the bank receives its profits immediately, it also means that a bank must be constantly turning its portfolio with new loans in order to remain profitable. The other policy banks have generally used to ensure that the value of their investment remains appropriate is to constantly by and sell mortgages in the secondary market. This trading activity allows banks to ensure that they are profiting both from the rise and fall of interest rates over time while at the same time ensuring that they are within the mandated Federal Reserve lending requirements.

Do not make assumptions. If you are unsure about anything...
ASK YOUR MORTGAGE COMPANY QUESTIONS!

1. Inquire about all fees and costs associated with this loan, including the mortgage rate and APR (annual percentage rate).

As with any residential mortgage loan....

2. Do not assume that the mortgage interest of this loan will be tax deductible. Consult a qualified tax advisor for potential tax benefits.
3. Be sure to ask if there is a pre-payment penalty for paying off the loan too early or making substantially large payments against the principal.