Definition
A Fixed Payment Mortgage is a type of mortgage loan where the periodic payments of interest and principal remain constant over the entire term of the loan. Unlike some other Fixed Rate Mortgages, which may have variable payments despite a constant interest rate, Fixed Payment Mortgages ensure that the borrower will pay the same amount each month, making financial planning and budgeting more predictable.
Example
Consider a Fixed Payment Mortgage with the following details:
- Loan Amount: $200,000
- Annual Fixed Interest Rate: 4%
- Term: 30 years (360 months)
The monthly payment of interest and principal would be calculated as follows:
- Monthly Payment (Principal and Interest): $955.65
- Added to the monthly payment is the amount set aside for an escrow account covering property taxes and insurance, which may vary year to year.
Thus, with the fixed component, the homeowner knows they will consistently pay $955.65 monthly towards the mortgage principal and interest, irrespective of fluctuations in other expenses.
Frequently Asked Questions (FAQs)
What is the main advantage of a Fixed Payment Mortgage?
The principal advantage is the predictability of payments. Borrowers know exactly how much they will need to pay each month, which simplifies budgeting and financial planning.
How does a Fixed Payment Mortgage differ from a Graduated Payment Mortgage?
While a Fixed Payment Mortgage maintains consistent monthly payments, a Graduated Payment Mortgage starts with lower payments that increase over time, which can make it more complex to budget for in the long run.
Can the interest rate change during the term of a Fixed Payment Mortgage?
No, the interest rate remains constant throughout the term of the mortgage, providing financial stability and predictability.
How are property taxes and insurance premiums handled in a Fixed Payment Mortgage?
These are typically managed through an escrow account, with periodic payments added to the mortgage payment for covering taxes and insurance, though the principal and interest payment remains fixed.
What happens if interest rates in the market decline significantly?
Since the interest rate is fixed, borrowers will not benefit from lower interest rates unless they refinance their mortgage.
Fixed Rate Mortgage
A mortgage with a fixed interest rate throughout the life of the loan, though not necessarily fixed monthly payments unless it is a Fixed Payment Mortgage.
Graduated Payment Mortgage
A mortgage where the payments start low and gradually increase over time.
Escrow Account
An account held by the mortgage servicer to collect and pay property taxes and insurance on behalf of the homeowner.
Amortization
The process of paying off a debt with a fixed repayment schedule in regular installments over time.
Online Resources
- Investopedia - Fixed Payment Mortgage
- Consumer Financial Protection Bureau - Understanding Mortgage Basics
- Bankrate - Mortgage Basics
References
- “The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls, Second Edition” by Jack Guttentag
- “Your Essential Guide to Understanding Fixed Rate Mortgages” by Robert Shaw
Suggested Books for Further Study
- “The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns” by John C. Bogle (Chapter focusing on mortgages)
- “Home Buying Secrets: What Your Lender Won’t Tell You and How to Get Better Terms” by Ralph R. Roberts
- “The Mortgage Wars: Inside Fannie Mae, Big-Money Politics, and the Collapse of the American Dream” by Timothy Howard
Real Estate Basics: Fixed Payment Mortgage Fundamentals Quiz
### What defines a Fixed Payment Mortgage?
- [x] Consistent monthly payments of interest and principal.
- [ ] Variable interest rates over the loan term.
- [ ] Varying monthly payments.
- [ ] It requires a balloon payment at the end.
> **Explanation:** A Fixed Payment Mortgage features consistent monthly payments that combine interest and principal, making budgeting straightforward for the borrower.
### Can the interest rate of a Fixed Payment Mortgage change during its term?
- [ ] Yes, it can increase or decrease.
- [ ] It varies every few years based on the market.
- [x] No, it remains constant.
- [ ] It is only subjected to a one-time adjustment.
> **Explanation:** The interest rate in a Fixed Payment Mortgage is fixed and does not change during the term, providing financial predictability.
### What happens if market interest rates drop significantly during the term of a Fixed Payment Mortgage?
- [ ] Monthly payments will automatically get reduced.
- [ ] The mortgage term will get extended.
- [x] Borrowers must refinance to take advantage of lower rates.
- [ ] Borrowers will face higher monthly payments.
> **Explanation:** Borrowers with Fixed Payment Mortgages must refinance to benefit from lower market interest rates since their current rate remains fixed.
### Which aspect of housing expense remains constant in a Fixed Payment Mortgage?
- [ ] Property taxes.
- [ ] Homeowners insurance premiums.
- [x] Principal and interest payments.
- [ ] Utility bills.
> **Explanation:** In a Fixed Payment Mortgage, the principal and interest payments remain constant, while other expenses like property taxes and insurance premiums may vary.
### How does a Fixed Payment Mortgage impact financial planning?
- [x] It offers predictability in monthly payments.
- [ ] It causes uncertainty due to fluctuating payments.
- [ ] It complicates budgeting due to variable interest rates.
- [ ] It provides tax deductions similar to unsecured loans.
> **Explanation:** Fixed Payment Mortgages offer predictability in monthly payments, which simplifies financial planning and budgeting for borrowers.
### What term is often associated with Fixed Payment Mortgages for managing property taxes and insurance?
- [ ] Principal account.
- [ ] Redemption fund.
- [ ] Variable account.
- [x] Escrow account.
> **Explanation:** Fixed Payment Mortgages often involve an escrow account to manage property taxes and insurance, though the principal and interest payments remain fixed.
### What financial strategy might a borrower consider if they have a high-interest Fixed Payment Mortgage, and market rates drop?
- [ ] Modifying the mortgage through negotiation.
- [ ] Taking out a payday loan.
- [x] Refinancing the mortgage.
- [ ] Adjusting monthly household budgets.
> **Explanation:** Borrowers with a high-interest Fixed Payment Mortgage may consider refinancing to secure a lower interest rate and reduce monthly payments.
### Which characteristic does NOT apply to a Fixed Payment Mortgage?
- [ ] Constant interest and principal payments.
- [x] Payments increase gradually over time.
- [ ] Fixed interest rate.
- [ ] Benefits long-term budgeting.
> **Explanation:** Payments that increase gradually over time are a characteristic of Graduated Payment Mortgages, not Fixed Payment Mortgages.
### Why do some borrowers prefer Fixed Payment Mortgages over other types?
- [ ] Variable payments add flexibility.
- [x] Predictable payment amount aids financial stability.
- [ ] Higher interest rates bring more tax benefits.
- [ ] Reduced upfront costs.
> **Explanation:** Predictable payment amounts aid financial stability, making Fixed Payment Mortgages preferable for borrowers who value consistent monthly budgets.
### What must be computed to determine the monthly payment in a Fixed Payment Mortgage?
- [ ] Only the principal amount.
- [ ] Variable interest projections.
- [ ] Annual tax rates.
- [x] Amortization of principal and interest over loan term.
> **Explanation:** To determine the monthly payment in a Fixed Payment Mortgage, one must compute the amortization of both the principal and interest over the loan term.
