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Home Mortgage Fixed Interest Rates

In a fixed rate mortgage the home owner pays the same interest rate for the length of the mortgage.

The advantage to fixed mortgage interest rates is obvious, a homeowner knows exactly what interest rate they’ll pay for the next twenty or thirty years. This means they will know what their mortgage payment will be because it will always be the same. In a fixed rate mortgage, the mortgager can’t raise the interest rate at a later date.

The vast majority of mortgages issued are fixed rate mortgages because they are simple and easy to understand. Fixed rate mortgages are also the best deal for the average mortgage holder because they don’t surprise individuals with higher interest rates.

Fixed Rate Mortgages & Adjustable Rate Mortgages

There is another kind of mortgage available to home owners it is called an Adjustable Rate Mortgage or ARM. In an ARM the mortgage lender can change the mortgage interest rate during the life of the mortgage.

The advantage to an ARM is that lenders might lower the interest rate if it falls. Unfortunately the reverse is also true interest rates could increase with an ARM. ARM interest rates are usually based on the market interest rates.

It is often in a home owner’s advantage to refinance an ARM to a fixed rate mortgage. A homeowner should refinance an ARM when the interest rates are lowest.

How Interest Rates Are Set

The fixed interest rate on a traditional mortgage is determined by the overnight averages of interest rates compiled by various services. These services survey the interest rates being offered by banks and come up with an average interest rate for mortgages and other bank products.

Interest rates are usually based on the length of a mortgage, generally; longer mortgages come with slightly higher interest rates. Shorter mortgages such as 15 year mortgages may have lower interest rates but they often have much higher payments.

How Interest Rates Affect Mortgage Principal

Interest rates affect the mortgage principal or the amount of money you’ll have to pay off on the mortgage. The interest is added to the principal, which is used to calculate the payments you’ll have to make to pay it off.

Mortgage interest and principal is usually based on the number of years it will take to pay off the mortgage if you make just the monthly payment. If it will take 30 years to pay off the mortgage it is a 30 year mortgage and you’ll need to make 360 payments to pay it off.

The mortgage lender adds interest to the principal and the payments because it is how they make money from issuing mortgages. The interest is the profit that the mortgage lender will make from the mortgage.