Fixed Rate Home Loans – Are Your Refinancing Options Working in Your Favor?
Fixed rate home loans can save you money. However, many people get confused by fixed rate home loans and variable rate home loans. These two types of home loans are very different from one another. While fixed rate home loans may seem easier to understand than variable rate home loans, there are many differences between the two that you should be aware of before signing any papers.
First, a fixed-rate home loan is simply a mortgage loan in which the interest rate throughout the life of the loan remains the same, not changing. In other words, the rate does not change during the life of the loan. For most borrowers this is preferable because fixed rate home loans offer long-term stability. By paying a fixed rate monthly for the life of the loan you limit your risk because the loan will not go into default and you are protected from any fluctuation in the real estate market. Additionally, a fixed rate home loan is often a better long-term investment than a floating rate home loan because the lender knows that they will be making the same monthly payment for the life of the loan.
Unfortunately, fixed rate home loans are not perfect. In fact, fixed rate home loans come with their share of disadvantages. Some of these disadvantages include higher loan costs, higher loan payments, less advantageous loan terms, and lessening of the overall return on your home.
Higher monthly payments are one of the biggest disadvantages to fixed rate home loans. These monthly payments are often significantly higher than you would pay if you had chosen a different type of loan. If you are planning on purchasing a home in the future and have budgeted a sizable amount for your down payment, then you are probably better off avoiding adjustable rate mortgages. Adjustable rate mortgages come with much higher monthly payments and the interest rates are subject to change.
Variable rate loans, or perhaps refinancing, are perhaps the easiest way to lower your monthly payment while still maintaining good credit. This type of loan allows you to shift between fixed rate home loans over a fixed-rate period of time. During this fixed rate period, your payments will stay at their lowest rate while you make regular monthly payments to the lender. The lender’s rates will never change during this time period. You will also be able to choose a longer repayment term which can save you thousands of dollars in interest charges.
You also lose out when you choose to pay interest rates above the prime interest rate. Because the prime interest rate is higher, fixed rate home loans cost you more money in interest. If you cannot afford the fixed term, then choosing a shorter term option is your best bet. You may also want to think about refinancing just to lower the monthly repayments. Many people opt for this option, especially when they find that they have an adjustable interest rate that is going up.
When comparing fixed rate home loans, it is wise to look at all the costs involved and to look at all the options. If you think you may have an issue with the terms of the mortgage, don’t sign the papers until you understand them completely. There is no reason to take the risk of losing your home to a loan that could cause financial ruin later on. Even if interest rates have dropped since you purchased your home, do not refinance just to get lower interest rates. There are other ways to lower your monthly payments and keep your house longer.
You need to compare interest rates, loan terms, and even the level of interest before choosing a fixed rate home loans. Do not refinance just to reduce your monthly repayments because you think the interest rates will drop later on. This time line may not work in your favor and you could end up losing your home. It is best to take your time and choose wisely.