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What Is a Fixed Rate Mortgage Loan?

July 18, 2018 | Posted by LCEF

Home ownership is like opening a new chapter in your life. A chapter where you put down roots, raise a family, invest in a community and even grow old together. Home ownership is a time when you settle into a place you can call home.

Fortunately, home ownership is affordable for many families due to the mortgage loan.

The fixed rate mortgage loan is the most common loan among homeowners. There are two versions. The 15-year and the 30-year.

Let’s explore these differences.

Why is the fixed rate loan so popular?

The main benefit behind the fixed rate is that the interest rate remains the same throughout the life of the loan. In other words, the monthly payments don’t change.

Compared to the adjustable rate mortgage (ARM), where the interest rate fluctuates according to the appropriate index, you know what you are going to pay the first year as well as the last year of your loan. In addition, you can often buy a home for as little as a 5% down payment.

The only drawback, however, is that interest rates are usually higher when compared to an ARM. For this reason, ARMs are often a good choice for homeowners who plan to sell after a few years. But if you plan to stay in your home for at least five years, then a fixed rate loan is recommended.

Which should you choose: 15 or 30-year loan?

Because of the low payments, 30-year residential loans have opened up the possibility for home ownership. The lower payments and low down payment allow many families to buy who would simply be unable to afford the payments. This also means you can borrow more money and get a bigger house.

In fact, you can get the same loan amount with a 30-year as you could get with a 15-year but still have lower payments.

Yet for every advantage, there are drawbacks when it comes to taking out a 30-year over a 15-year loan.

Drawbacks of 30-year residential loan

It’s pretty simple: the longer the mortgage, the more interest you’ll pay. Why? The lender charges a higher interest rate to compensate for the longer term.

Of course, your monthly payment will be lower, but because you are paying off your loan over such a long time you end up paying more interest. Want to know how much more or less interest you pay based on the length of the term of a loan? Then check out our mortgage amortization calculator.

Another drawback involves your financial goals. Let’s say you are retiring in 15 years. The 30-year mortgage might not be a good idea considering the fact that you’ll be spending 15 years on reduced income as a retiree paying off your mortgage. Instead, take out a 15-year loan and pay off your home before you retire.

Residential loans through LCEF

LCEF is pleased to offer residential loans to LCMS Rostered Church Workers (RCWs). See our fixed-rate and ARM options.

By the way, LCEF does not set its loan rates to any index. Instead, we use our cost of funds as a basis for setting loan rates. In doing so, we have more control over the rates offered to borrowers. Learn more about how we set loan rates based on cost of funds here.