Pros and Cons of Fixed Rate Mortgage Loans
A fixed rate mortgage is basically a loan contract where the mortgage rate is set at the time of purchase and does not change during the course of the contract. This type of mortgage is often referred to as a “fixed rate” because the rate will not fluctuate during the term of the mortgage. A typical fixed rate mortgage is considered safer than adjustable rate mortgages (ARM), which have variable rates that can vary throughout the life of the mortgage. However, some fixed rate mortgages come with extra costs, such as prepayment penalties.
Fixed rate mortgages also offer borrowers peace of mind regarding their ability to budget. With fixed-rate mortgages, borrowers know what they can afford and will not be over-spending because of interest rates going up. However, these mortgages come with some advantages and drawbacks. These include:
o Homeowners who take advantage of fixed rate mortgages typically pay less per month in financing charges. The reason for this is that the payments remain stable, regardless of fluctuations in the federal funds rate. In addition, fixed-rate mortgages are good for borrowers who plan to live in their home for a long time. They do not have to worry about changing mortgage interest rates, because their payment will not fluctuate. However, for first time homeowners, it may be wise to consult with a mortgage professional to learn more about fixed rate mortgages and to find out if they would be right for you.
o Fixed rate mortgages come with a higher fixed monthly payment. This may be a drawback when you need to make large purchases, such as homes or cars. If your fixed monthly payment is not lowered, you will still end up paying more than a lender could charge you with an adjustable interest rate loan. Some borrowers pay more than twenty percent more per year over a period of fifteen years on fixed rate mortgages.
o Fixed rate mortgages typically require less initial cash outlay for the borrower. For many people, an adjustable rate mortgage is a requirement before they even think about buying a home. The payment may be too high for them to reasonably afford at that time, but an adjustable rate mortgage may be their best option. For others, however, adjustable rates can have negative consequences. They can suddenly increase without warning, and this may not be something a borrower wants to experience. As a result, fixed-rate mortgages often have a lower initial payment.
o Fixed-rate mortgages are usually less expensive than other options. When interest rates go up, fixed-rate mortgages tend to go down. This is due to the fact that they are guaranteed to stay the same. Some borrowers prefer to pay lower payments when interest rates are going down. If they think that they might be able to afford their fixed-rate mortgage in the future, they can defer payments until later and increase their payments as interest rates go up.
o Fixed-rate mortgages are more secure than other options. They do not fluctuate as much from one month to the next. With some other interest rate options, changes can be dramatic. Even small fluctuations can have large effects, especially if a borrower makes his or her payments late. With fixed rate mortgages, however, late payments are unlikely to cause significant harm to the monthly payment.
o Fixed-rate mortgages can offer a higher monthly payment than other options. The initial payment can be set at a number of points lower than the current interest rates. As the mortgage matures, the initial payment will go up. A homeowner can pay the mortgage off early by spreading the cost of interest over a longer time frame. However, there is generally no advantage to borrowers who plan on living in their home for a long time, since adjustable-rate mortgages have a much shorter payback time.