Economics
Fixed Payment Loan
A fixed payment loan is a type of loan where the borrower makes regular, equal payments over the life of the loan. The payment amount remains constant, with a portion going towards interest and the rest towards reducing the principal. This type of loan provides predictability for borrowers, as they know exactly how much they need to pay each period.
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eBook - ePubReal Estate by the Numbers
A Complete Reference Guide to Deal Analysis
- J Scott, Dave Meyer, Dave Meyer(Authors)
- 2022(Publication Date)
- BiggerPockets(Publisher)
Within each of these categories exist different options to be used, depending on your financial situation and investing strategy. Knowing which types of debt are best for a given situation can be tricky, so we’ve detailed the various types of loans and when to use them in the following section.Term Loans
A term loan is a form of debt financing where the borrower is lent money for a specific length of time and has a fixed repayment schedule. Common forms of term loans are mortgages, student loans, and auto loans.All term loans have the same basic format: The borrower agrees to borrow X dollars for Y years at Z interest rate. For example, a common mortgage could be structured as $200,000 for thirty years at a 4.5 percent interest rate. (Note that these are the same inputs we used when calculating interest earlier in the book.) Of course, there are many other variables in each loan, such as the payment frequency, down payment, balloon payments, collateral, loan covenants, and more. But at their core, all term loans follow this basic structure.Term loans can have either a fixed or an adjustable interest rate. With a fixed-rate loan, the borrower pays the same interest rate for the duration of the loan. For example, Sergio gets a mortgage for $330,000 at a fixed 4.5 percent interest rate for thirty years. With a fixed-rate mortgage, Sergio knows exactly what his payment will be for all thirty years of his loan. Typically, interest rates are slightly higher on fixed-term loans because there is less risk to the borrower than an adjustable interest rate.An adjustable-rate loan
- Nicholas Wallwork(Author)
- 2019(Publication Date)
- For Dummies(Publisher)
With a fixed-rate loan, the rate of interest that you pay remains constant, or fixed, for a certain duration, regardless of what happens with overarching interest rates. This fixed interest rate can be for the whole life of the loan or for an introductory period only (for example, fixed for the first five years of the loan).There are both advantages and disadvantages to fixed-rate payments:- On the plus side, your monthly payments will always be the same for the duration of the fixed period, which brings some welcome certainty. Knowing exactly what you need to pay each month is great for cash flow planning and is often considered a low risk.
- You’ll generally be paying a higher interest rate than you would with an adjustable-rate loan unless the interests rates rise above your fixed rate.
- If interest rates fall and stay low for a long period of time, you can be stuck with much higher monthly payments than adjustable-rate payments. You can, of course, refinance and switch to an adjustable-rate mortgage in the future, but that that takes time, effort, money, and likely a substantial fee from the lender for ending the loan early.
Adjustable-rate (or variable) mortgages
With this type of loan, the interest that you pay varies over time. It can vary in line with a fixed economic indicator, like the national base interest rate, or it can vary in line with the lender’s standard adjustable interest rate (usually at least a couple of percentage points above the base rate to account for the lender’s profit margin).Here are some of the pros and cons of adjustable-rate loans:- On the sunny side, you’ll generally pay a lower interest rate than you would with a fixed-rate loan.
- If interest rates fall, your payments will, too.
- You’ll have less certainty in terms of what you’ll be paying each month because interest rates can rise or fall out of your control.
- If interest rates rise, your payments will increase accordingly, so you’ll need to plan for a buffer.
Adjustable rates can vary wildly from lender to lender, so always do your homework on what’s available across the whole market. A good, independent mortgage broker will be able to help you with this (see “Finding the Right Product for You
eBook - ePubFinding the Uncommon Deal
A Top New York Lawyer Explains How to Buy a Home For the Lowest Possible Price
- Adam Leitman Bailey(Author)
- 2011(Publication Date)
- Wiley(Publisher)
The goal is always to find the loan that best fits your needs and ability to pay. Discussed in the next sections are a number of different loans that are typically offered to prospective homebuyers. While other types may be created and offered to borrowers in the future, the key to any type of loan is to determine how much money the buyer must pay to the bank monthly, and for how many years. Will the payments remain the same for the life of the loan? Will the interest rate fluctuate based on the condition of the financial market or on some readily ascertainable standard such as, for example, the federally established cost-of-living index? The Fixed Rate Mortgage The fixed rate mortgage is the most popular and predictable type of loan. In this scenario, the borrower pays the same interest rate for the loan’s entire lifespan. A fixed monthly payment will be applied every month to the principal and interest of your loan. The fixed rate loan options usually provide for a 10, 15, 20, or 30-year fixed rate mortgage. The Adjustable Rate Mortgage (ARM) These fluctuating mortgages are called adjustable rate mortgages. As many borrowers have found out in the past, monthly payments on such mortgages can rise dramatically to amounts the borrower may not be able to afford, depending on various economic conditions. For those persons who intend to own the home for a very short time, an adjustable rate mortgage—or ARM —may be a highly beneficial way to keep payments affordable. However, adjustable rate mortgages can be ticking time bombs in the case that interest rates greatly increase and the payments reach an amount beyond that which the borrower can afford. Such increases can lead to financial ruin or foreclosure,—or both, since the borrower may not only be unable to make the increased loan payments, but may also not be able to sell the home. ARMs allow a borrower’s interest rate to fluctuate according to a certain identified interest rate index
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