In: Root » Legal and finance » Loans and mortgages
Its rate does not change, its payment does not change and in 30 years, it is all paid off. It is the most popular mortgage, and when interest rates are less than 10 percent, most borrowers should get the traditional 30-year mortgage. With a $100,000 30-year mortgage at 8 percent, you would pay $733.77 principal and interest (P&I) per month. A portion of the P&I payment is the interest on your loan. The remainder of the payment reduces the loan's outstanding principal balance, slowly repaying the entire loan. Loans that are repaid gradually over their life are called amortizing loans. The loan amortization char for a $100,000 loan at 8 percent shows the remaining principal balance over the life of the loan. You repay very little in the early years. At the end of ten years, your remaining loan balance is still $88,000; at the end of 20 years, $61,000; at the end of 30 years, it is paid off. The main advantage of the traditional fixed-rate mortgage is certainty that your rate, monthly principal and interest payments will not go up. Your payment stays the same for 30 years. Disadvantages If overall interest rates go down as they did in the early 1990s, your rate on a traditional mortgage will not go down with them. To take advantage of lower interest-rate levels, you would have to refinance, and that may cost thousands of dollars. Many people who bought homes in the early 1980s with fixed-rate loans at 14 percent and 15 percent refinanced in early 1985 to new fixed-rate loans at 12 per cent. Then they faced the prospect of paying even more to get the 10-percent loans being offered in 1986. More recently, in the early 1990s, lenders introduced zero-point and no-cost refinance loans that enabled many borrowers to refinance repeatedly without adding to their loan balances, or being faced with extraordinary out-of-pocket costs. A fixed-rate loan is a two-edged sword: It is good when rates go up, but bad when rates go down.
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