FIXED RATE DOESN'T MEAN FIXED PAYMENTS

Written by Blanche Evans 

This is one of the best times to get a fixed-rate mortgage. A fixed rate simply means that the mortgage lender charges you a fixed rate of interest that doesn't ever change over the life of the loan.

If you get a fixed rate of 4.00 percent, you will be paying four percent in interest until you sell the home. At such a low rate, it's unlikely you'd refinance.

You can see how much you pay in interest in an amortization schedule. The longer you pay on a fixed rate, the more interest you pay down because your interest payment is front-loaded into the beginning years of your loan schedule.

The longer you own your home and pay on your mortgage, you'll see that a greater percentage of your monthly payment goes to reduce principal, helping you to build equity or ownership in the home.

An adjustable rate mortgage is initially lower than a fixed rate, but the loan will adjust periodically according to market rates after one year, three years, five years, or whatever you and the lender have agreed to.

The danger is that the new adjusted rate could become too expensive for you, especially if it adjusts higher every year. Part of your terms can include ceilings that limit the number of times and the amount your loan can increase. Adjustments can add as much as two percentage points more to your interest rate, or as much as several hundred dollars more to your monthly payment.

Rates first hit historical lows in 2011, and have retouched those lows several times since. Any time the national average for fixed rate mortgages is below four percent, that's a gift to homebuyers. Adjustable rates are certain to be higher down the road, making fixed rates a lower risk.

Even with a fixed rate mortgage, your monthly payment can change in other ways. You may decide to roll the costs of your mortgage into your loan, in which case you'll be paying the APR rate because the loan amount is higher, yet is still being compressed into a 30, 15 or ten-year term, depending on your loan.

Another way your monthly payment can change is by adding private mortgage insurance (PMI). If you put less than 20 percent of your home's purchase price as a down payment, lenders will require that you pay for PMI. Rates on PMI vary, but you can expect your payments to rise by 0.3 percent to 1.2 percent of the loan amount.

Last, your monthly payments can include escrows for hazard insurance and for property taxes. You should receive a statement from your insurer when it's time to renew your insurance, and your lender will divide the annual amount into monthly payments.

Your property tax authority will send you a new statement annually, usually in the spring or early summer. If you're basing your future payments on what the previous owner paid, you may be in for a surprise. Your tax basis will be based on the purchase price of the home. Most communities limit the amount that the taxing authority can raise property taxes every year.

Mortgage interest, PMI and property taxes are deductible from your income taxes if you itemize, but you still have to make the payments. For these reasons, you want to stick closely to borrowing guidelines such as loan-to-income and debt-to-income ratios.

Your mortgage should be no more than 28 to 32 percent of your gross income or 36 to 42 percent of your income including your monthly debts. That way you'll be able to handle any future changes in your monthly mortgage payments.