A fixed-rate mortgage is a type of mortgage loan that comes with a fixed interest rate throughout the lifespan of the loan. Fixed-rate loans can be conventional mortgage loans, or mortgage loans guaranteed by the Federal Housing Authority or the Department of Veteran affairs.
The interest rate of these bank statement mortgage loans is normally a bit more compared to that used for a 30-year Treasury bond, at the date when the mortgage is given. This is due to the fact that investors are seeking something that gives them profit without risking too much. That is how mortgage interest rates get affected by Treasury bonds.
The benefit of a fixed-rate mortgage is the fact that the payment rate remains the same for every monthly. The predictability of the payments makes it easier for borrowers to plan their budget.
There’s no need to worry about future raised payments like you would normally do with the adjustable-rate mortgages. You pay off a small portion of the principal every month, which automatically raises your home equity.
On the downside, the interest rate for fixed loans is higher than for an adjusted-rate loan. This makes it more costly if the mortgage rates stay the same or reduce in the future.
Another disadvantage of fixed loans is the fact that if you pay off your principal at a much slower rate than in the case of an adjustable-rate loan. A bank statement mortgage like this one may not be suitable for people who want to sell their home within 5 to 10 years, because the payments made over the starting years majorly cover the interest.
Moreover, it is not easy to qualify for fixed-rate mortgage loans and you’ll pay greater closing costs because banks fear they might lose their money if rates increase.
Types of Fixed-Rate Mortgages
1. 5-Year Fixed-Rate Mortgage
This loan maintains a constant interest rate for the first 5 years. From there it changes into an adjustable-rate mortgage. The upside is the fact that the starting interest rate is less than for a 30-year mortgage plan. On the downside, after the 5-year period your interest rate can go higher very fast, depending on the current rates. This is a good choice if you are certain you’ll sell your house within 5 years.
2. 15-Year Fixed-Rate Mortgage
This loan is very attractive to many because it comes with lower interest rates. Moreover, it allows you to finish off the principal payment quicker than for a 30-year plan, meaning you accumulate equity faster. However, these fixed loans come with higher payments; therefore there is increased risk of a default when your income goes down.
3. 30-Year Fixed-Rate Mortgage
This is probably the most affordable fixed-rate mortgage loan. Although it comes with greater interest rates, the expected monthly repayment is lower, as loan repayment is equally spread over a period of 30 years. This is a great option if you plan to live in your house for a very long time, or have low-income.