Fixed mortgages typically have a slightly higher interest rate than adjustable rate mortgages. However, the interest rate will not fluctuate with the prime interest rate and the homeowner is assured a set repayment amount each month.
Adjustable rate mortgages may feature a period of fixed interest; for example, a ten year ARM might have a fixed interest rate for three years, then switch to an adjustable rate every three months. Only a fixed rate mortgage guarantees that the interest rate will not fluctuate for the entire term of the loan.
Who Can Get a Fixed Rate Mortgage?
Banks and other mortgage lenders each have their lending criteria. Before applying for a fixed mortgage, order a 3-in-1 credit report to ensure credit reporting accuracy, then decide how much money is available for a down payment.
Some lenders offer both high-ratio and conventional fixed rate mortgages, while others do not offer this option on high-ratio mortgages (a mortgage loan for an amount greater than 75% of the property value).
How Long is the Term on a Fixed Mortgage?
It is now possible to get a guaranteed interest rate on a fixed mortgage for up to 50 years in the United States. In some areas, property prices are so high that even a 30 year fixed mortgage monthly payment is too expensive for the average family.
In Canada, fixed rate mortgages are far less common. TD Canada Trust offers fixed mortgages for terms of one to ten years, while CIBC's FirstLine offers a 25 year fixed mortgage rate, but only to first-time homeowners.
Is a 50 Year Fixed Mortgage Really a Good Idea?
It might be the right option for some homeowners, especially those in expensive market areas. The benefit to the homeowner is that the interest rate would never change. With an ARM, an interest rate of 6% could rise to 9% in a year, for example, if rates increased.
However, the idea of paying for a home over the next 50 years is daunting. When considering a mortgage with a term greater than 30 years, the borrower might consider a less expensive property. Because so much of the payment goes to interest, the savings per month may not be as much as the borrower would expect.
Are 10, 30, or 50 Year Fixed Mortgages Different?
To understand how fixed rate mortgages work, take a $295,000 mortgage loan with a 7% fixed interest rate, for example. Over a 30 year term, the monthly payment is $1,942.88. The total amount a borrower will pay over the 30 year term is $699,436.80.
The same $295,000 mortgage loan, with a 7% fixed interest rate over a 50 year term, requires a monthly payment of $1,752.45, so the homeowner pays $190.43 less per month with the 50 year term. However, after an additional 20 years of payments, this same property now requires $1,051,470.00 in payments over the life of the loan.
In this example, saving $190.43 per month added an additional $352,033.20 to the total cost of the home. Use the RBC Royal Bank Mortgage Calculator to experiment with different fixed interest rates and mortgage terms.
Where to Find the Best Fixed Mortgage
A variety of individuals and institutions offer fixed rate mortgages, including mortgage bankers, mortgage brokers, commercial banks, credit unions/caisses populaires, stock brokerages, and private lenders.
Most banks, such as ING Direct and Bank of America, offer online tools, calculators and quotes to help borrowers understand the mortgage products these banks have to offer. Compare mortgages online, but visit in person to discuss the details.
A local mortgage broker can offer mortgage quotes from a variety of lenders. Compare at least three to five different options before committing to a mortgage loan.
Considering refinancing and switching from an ARM to a fixed rate mortgage? Read Mortgage Refinancing Tips for more information.
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