First Time Home Buyer’s Guide To Fixed Rate Mortgages

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.

 

mortgageterms

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.

Comments

  1. I think the main trap is the thinking that a primary residence is somehow an “investment”, when it’s actually a long-term purchase. Happily, if you get a home at much less than 8% interest (as the example uses), you aren’t spending nearly that amount. If we stick with our 30 year mortgage, we’ll end up paying about $400,000 total on our $185,000 mortgage. But we’re hoping to refinance to a 15 year mortgage, reducing our overall costs.

  2. Hmmm…an ‘interesting’ take on fixed rate mortgages, in my opinion.

    I’m not deluded about the amount of interest paid at the end of the loan but I did lack the $300K+ cash needed to buy my house outright. And the other options if I want to be in my own home as opposed to renting were…variable rate (really?), subprime/interest only (oh, I don’t think so). So the other options are????

    Fixed rates are not a trap,they’re an informed decision, I think.

    I’ll be interested to see what other people think about the article.
    Oops…forgot to say great post! Looking forward to your next one.

  3. ok, I’m confused! I thought that what was *good* was fixed-rate mortgages, and that you should get the 15-year term because then you end up paying less interest. What is a “good” interest rate for a 15-year FRM? Are there alternate mortgages that are more desirable than a fixed-rate mortgage? Can you tell I don’t own a home? Haha. Actually, frugal dad, if you have any literature you can recommend as a guide to first-time home buyers, that would be awesome ! (not that we’re buying soon… but it would be useful to know! )

  4. Huh? Does this person have any idea what she is talking about??? I think she hasn’t got a clue. Yes, you are paying more in interest than your house is worth TODAY. But first you are paying some of it in future dollars that is worth less. Second your house will not be worth the same in 30 years as it is today. Third, you are not paying 8% interest if you get a tax deduction. Fourth, who is paying 8% interest anyway? Fifth, what are the alternatives? Not getting a mortgage? Saving 100% of your downpayment and renting until you have all of the money? Paying rent is fine sometimes (and there are plenty of times it makes sense to rent). But unless rent is significantly below your mortgage payment, it won’t get you to own your home when 30 years is over. Frugal Dad, how can you post this article? Even with her unlikely example of 8% mortgage rates (in today’s market, that is a very high rate), this article makes no sense.

  5. @Andrea and @Michelle: Miranda touched on what I think Jazmin was getting at in the article. For years we’ve considered home purchases an investment, and to some extent they still can be. But after watching home values plummet in this recession we now know first hand that nothing is a sure thing. Perhaps it is better to think of it as an extended purchase – one that when carried out over 30 years costs far more than the original purchase price. That is the “30 year, fixed rate trap” to me.

    @neimanmarxist: 15-year fixed rate mortgages are usually available at lower terms than their 30-year counterpart. One thing to consider is that a 15-year FRM carries a larger payment, so you typically cannot buy quite as much house. Of course, that may be a good thing!

    As far as first-time home buyer literature, I would recommend something like Home Buying For Dummies as a great primer on the home buying process. We often write off the “For Dummies” books as overly simplistic, but this one by Eric Tyson is actually quite good as a real estate primer. I believe a 4th ed was recently released on Amazon with more up-to-date information.

  6. A house is a house,a place to live, not an investment, Plus of buying a house, after 30 years, or how ever long the mortgage is, you stop paying, you still have all the other expenses.
    I’m paying $525 a month for my mortgage, 25 years from now I won’t be any more. When I was renting I was paying $485 a month, what will rent be in 20 years?
    I plan on living where I am for some time.
    If a house is an investment, buy one and rent it out.
    My mother is selling her house after 38 years, it cost about $40,000 in 1971. it’s on the market for $160,000. $40,000 doubled twice is $160,000 in 38 years. If they put $40,000 in a 5.5% savings account in 1971 she would have $320,000, just think what CDs were paying in the late ’70s early ’80s.

  7. I agree with all of the comments about a house being a place to live and not an investment.

    Unfortunately, I don’t think this was a very good article. It seems that the author’s main point was that people pay a substantial amount of interest over the life of the loan and she chalks it up to the fact that they selected a fixed rate mortgage. Problem is that regardless of whether you finance the house with a fixed rate loan or a variable rate loan you are still going to pay alot of interest if you finance it over 30 years.

  8. @Lane: I would agree with you – you could really take the “fixed rate” point out of the argument and make it a stance against mortgages. Of course, 100% down plans aren’t feasible for most people, so for me mortgages are sort of a necessary evil these days.

  9. This couple of paragraphs (I hesitate to call it an article) is almost unreadable and woefully confusing. Not to mention the fact that it doesn’t actually contain, you know, a POINT.

    Most home buyers who fall into the trap of the fixed rate mortgage…

    Trap? As opposed to what? A variable rate? Renting? A 50-year ARM? What is the message here?

    If, as the author says: “Common questions of first time home buyers are “what mortgage is right for me?…”

    Then why not actually discuss the options?

    Finally, in your comment above, you say “…touched on what I think Jazmin was getting at in the article.”

    Dude, if you don’t know what she was getting at then why did you publish it!?

  10. Hmm . . . yeah, I remember when I and my husband bought our first residence (a condominium) on a fixed-rate mortgage, and I looked to see how much we’d REALLY pay over the life of the 30 year loan.

    After I picked myself up off the floor, I checked the fine print in the contract. No pre-payment penalties, huh? Okayyyy . . .

    So we saved our pennies and paid extra on the PRINCIPAL every month. $50 here, $100 there. We cut our mortgage payments from $500/mo at the beginning to $150/mo seven years later, when we sold the condo to but the current home.

    On a fixed rate mortgage. With no prepayment penalties. Making extra payments to the principal each and every month.

    Debt is debt, mortgage or otherwise. Interest is interest, regardless of what it’s being charged for. Pay off ALL your debts. And read the fine print.

  11. For Dave #7 comment, even if your mom put $40,000 in a cd in the 70′s she still would have paid to live somewhere, so that doesn’t compare.

    The best option is to get a 30 year fixed rate mortgage but pay it like it is a 15 year loan (make sure you have no prepayment penalties.) This way you will have it paid off in 15 years saving lots of interest, but if times get tough you have the option of more payments. This also means to buy less than you can afford. Then in 15 years you can live in the home mortgage free or sell to upgrade to a larger place.

  12. What I was saying was not a very great investment, but they lucked out good on interest, they had a 4.25% for 20 years. they made money by not paying it off early, just keeping savings accounts

  13. I have a question that I hope someone can answer for me. A few days ago I had a guy come to my house trying to sell me a hybrid ARM loan. He claimed that a FRM makes you pay the interest on the orignal amount throughout the life of the loan, while this ARM only makes you pay interest on what you owe. Is this true? I have a 260,000 loan. So am I paying interest on $260,000 every month or am I paying interest only on the amount I still owe on the principal? His statement doesn’t make sense to me.

  14. The article was worthless in that it offered no alternatives to the FRM, and outdated interest rates.
    The average length of time someone keeps a mortgage is just over 4 years, the average length of time people stay in a house is 7 years. So the longer the mortgage, the better!
    @Andrea – I am a big believer in Interest only mortgages because 1. you have control of your money, 2. you get a bigger tax deduction, 3. your money is not being invested in “equity” which is a horrible place to keep your money, 4. for the first 4 to 7 years of a FRM, you are mostly paying interest anyway. Any mortgage is an informed decision. ARM’s and Interest Onlys are excellent choices in certain situations, but they are not for everyone.
    @Chris – the hybrid ARM seems to be some sort of Interest Only loan. That’s the only way you pay interest on what you owe. Interest Only Loans are great tools but one has to really understand them, have a plan around them, and be disciplined to take full advantage of them. Most “hybrid” loan products have a unique purpose. Unfortunately unknowing or unscrupled mortgage people used them to qualify otherwise unqualified people for mortgages.
    Be informed, be smart and make sure the person offering you a mortgage loan truly has your best interest (short and long term) as their top priority.

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