A fixed-rate mortgage (FRM), often referred to as a “vanilla waffer” mortgage loan, is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan, as opposed to loans where the interest rate may adjust or “float”. As a result, payment amounts and the duration of the loan are fixed.
Other forms of mortgage loans include interest only mortgage, graduated payment mortgage, variable rate (including adjustable rate mortgages and tracker mortgages), negative amortization mortgage, and balloon payment mortgage. Unlike many other loan types, FRM interest payments and loan duration is fixed from beginning to end.
Fixed-rate mortgages are characterized by amount of loan, interest rate, compounding frequency, and duration. With these values, the monthly repayments can be calculated.
Benefits of a 15-year, fixed-rate mortgage
Borrowers who are looking for an unchanging mortgage payment for a specific period are often drawn to a 15-year, fixed-rate mortgage, which allows them to time their loan payoff to meet other financial goals.
Definition of a 15-year, fixed-rate mortgage
The main feature of a fixed-rate mortgage loan is that the interest rate and the monthly payments for principal and interest are constant for the entire loan period. Borrowers of a fixed-rate loan are given a loan amortization schedule at settlement that states the exact amount of their principal and interest payments for the entire loan period.
The percentage of the payment that is allocated to interest and to reducing the principal balance will change over time, but the monthly payment for principal and interest will not. The housing payment may change for borrowers who pay their property taxes and homeowners insurance through an escrow account with their mortgage payment because these bills adjust over time.
Advantages of a 15-year mortgage
Fixed-rate mortgages are popular with homebuyers because they allow the borrowers to budget around a steady payment. They are available for various loan terms from 10 to 40 years, usually with a higher interest rate charged for the longest loan period. A 15-year, fixed-rate mortgage will generally have a lower interest rate than a 30- or 40-year mortgage.
Disadvantages of a 15-year mortgage
While the safety of a fixed interest rate can be comforting, the disadvantage of a 15-year, fixed rate loan is that the borrowers cannot take advantage of lower interest rates other than by refinancing into a new home loan.
While the interest rate on a 15-year loan is usually lower than a mortgage with a longer loan term, the payments are higher because of the shorter time frame in which to pay the loan in full.
15-year mortgage borrowers
Homeowners who have a goal of owning their home without a mortgage by a certain date or simply as fast as they can afford it may opt for a 15- or 20-year fixed-rate mortgage rather than a loan with a longer term. A 15-year, fixed-rate loan can also be a good option for homeowners who want to refinance but do not want to extend their mortgage payments for another 30 years.