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  • Overview

    Unlike adjustable-rate mortgages (ARM), fixed-rate mortgages are not tied to an index. Instead, the interest rate is set (or "fixed") in advance to an advertised rate, usually in increments of 1/4 or 1/8 percent.

    The fixed monthly payment for a fixed-rate mortgage is the amount paid by the borrower every month that ensures that the loan is paid off in full with interest at the end of its term.

     

    The United States Federal Housing Administration (FHA) helped develop and standardize the fixed rate mortgage as an alternative to the balloon payment mortgage by insuring them and by doing so helped the mortgage design garner usage.[1] Because of the large payment at the end of the older, balloon-payment loan, refinancing risk resulted in widespread foreclosures. The fixed-rate mortgage was the first mortgage loan that was fully amortized (fully paid at the end of the loan) precluding successive loans, and had fixed interest rates and payments.

    Fixed-rate mortgages are the most classic form of loan for home and product purchasing in the United States. The most common terms are 15-year and 30-year mortgages, but shorter terms are available, and 40-year and 50-year mortgages are now available (common in areas with high priced housing, where even a 30-year term leaves the mortgage amount out of reach of the average family).

    Outside the United States, fixed-rate mortgages are less popular, and in some countries, true fixed-rate mortgages are not available except for shorter-term loans. For example, in Canada the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years. A fixed rate mortgage in Singapore only has the interest rate fixed for the first three to five years of the loan, after which it will become variable. In Australia, "honeymoon" mortgages with introductory rates are common, but can last as short as a year, and may instead offer a fixed reduction in interest rate rather than a fixed rate itself. Furthermore, they are often combined with properties of flexible mortgages to create what is known as an Australian mortgage, which often allow borrowers to overpay to reduce interest charges and then draw on these overpayments in the future.

    The mortgage industry of the United Kingdom has traditionally been dominated by building societies, whose raised funds must be at least 50% deposits, so lenders prefer variable-rate mortgages to fixed-rate mortgages to reduce asset–liability mismatch due to interest rate risk. Lenders, in turn, influence consumer decisions which already prefer lower initial monthly payments. Nationwide Commercial recently issued a 30-year fixed rate mortgage as bridging finance.