Fixed Rate Mortgage

A fixed-rate mortgage offers a number of advantages, among which the fact that interest is fixed over the term of the mortgage and borrowers know what their payment will be every month. This arrangement is a good choice for persons who want to know their disposable monthly income, giving them sense of stability and peace of mind.

With fixed-rate mortgages, you will pay the same amount even if the rate of interest goes down, unless you decide to refinance your mortgage. At the same time, many borrowers are happy with this arrangement because it may work the other way around – even if the interest rate increases, your monthly payment is due at the lower fixed rate.

Persons with a fixed income and those who are on a tight budget benefit from having a fixed-rate mortgage. The reason is in its static character. Knowing how much you owe each month helps you develop a budget and makes it easier to keep track of your monthly spending. Consider inflation and changes in income. If your income increases over the years, you will enjoy larger disposable income given that your monthly payments are still the same. If inflation kicks in, you will still be paying the same amount. It should be noted that while this is true, your insurance and property taxes may increase, depending on your location.

How can you know whether a fixed-rate mortgage is for you? First, you should find out if the interest rate is as low as you want it to be. Second, you should be able to afford the payment for the property you plan to buy. Third, you need to know the total amount you owe. Some fixed-rate mortgages come with a number of fees build into the payment. Request an itemized explanation of these fees.

With some financial institutions, you can opt for a fixed-rate mortgage over a certain period of time. This mortgage will revert to an ARM after the initial period, but if you think you cannot afford it, you could extend the mortgage term.

You also have to choose between 15 and 30 year mortgage (although other terms are also offered, they are not very common). The benefit of applying for a 30 year mortgage is that your monthly payments will be lower compared to a 15 year mortgage. On the other hand, you will pay more in interest if the term of the mortgage is longer.

Obviously, fixed rate-mortgages have a degree of emotional security, while with adjustable-rate ones, you cannot predict what your payments will be in the future. Given the many advantages a fixed-rate mortgage offers, you probably want to know the disadvantages as well. First, this type of mortgage is harder to qualify for compared to an adjustable-rate mortgage. Your financial institution of choice may require an excellent or very good credit in order to qualify. In addition, if you plan to move in a couple of years or you bought a starter home and want to upgrade, this type of mortgage may cost you money. A fixed-rate mortgage is a good option if you plan to live in the house over the loan’s term. Those who plan to move out in a few years may opt for an adjustable-rate mortgage because it will come with a lower monthly payment. Moving before the monthly payment increases will save you some money.