Fixed Rate Mortgages
From LoveToKnow Mortgage
There are many types of mortgage programs to choose from, but there are only two basic types of rates: fixed rates and adjustable rates. Fixed rate mortgages are typically the most popular choice. Read on to find out why.
About Fixed Rate Mortgages
With adjustable rate mortgages, your interest rate changes periodically over the term of your loan, but with fixed mortgages your interest rate is fixed and will never change.
This means that the interest rate you lock in on the day you purchase your loan will be the same interest rate that you have when you make your final payment. Because the interest rate never fluctuates, your monthly mortgage payments will always remain the same for the interest and principal combined (payments may fluctuate slightly if property taxes or homeowner’s insurance is included).
Pros and Cons of Fixed Rate Mortgages
Fixed rates are often the preferred mortgage rate because they provide a sense of security and predictability that adjustable rate mortgages can't offer. However, they can also be the more expensive choice.
If you are trying to decide whether or not a fixed rate mortgage is for you, here are some other pros and cons to consider:
Pros
- If average interest rates surge outrageously, those with a fixed rate don't have to worry.
- Consistent payments make everyday budgeting easier.
- Unlike adjustable rate mortgages, fixed rate mortgages are easy to understand. There are no indexes, margins, fluctuations, or caps.
- When interest rates are low, fixed rates can be very affordable.
Cons
- Fixed rates are not flexible. They can't be customized to a borrower's individual financial situation.
- The initial cost of a fixed mortgage is higher than the initial cost of an adjustable rate mortgage because there are no deals, such as early rate and payment breaks.
- Fixed rates are locked in at the time of the loan purchase. If a borrower wants to take advantage of falling interest rates, refinancing is a must.
15 Year vs. 30 Year Loans
When you get a fixed rate mortgage, you generally have two term lengths to choose from, either 15 or 30 years.
For some people, a 15-year fixed mortgage is the better choice because it allows you to pay less interest over the life of the loan. Equity also builds faster because you are paying off the loan in a shorter amount of time.
For others, a 30 year fixed rate mortgage has more advantages, such as the ability to borrow money over a long term, lower monthly payments, and higher interest deductions during tax time.
Mortgage Calculators
One of the easiest ways to choose rate types and mortgage terms is to determine how much you want to spend on a house and how much you can afford on a monthly basis.
If you need help running the numbers, there are many different mortgage calculators online that can do the work for you.
Because there are so many things to consider before getting a mortgage, you may want to use different calculators for different purposes. For example, a mortgage amortization calculator can help you determine what type of loan term is best for you by estimating how fast you can pay down your mortgage and build up equity. Mortgage rate calculators, on the other hand, can help you determine what type of interest rate is best for your financial situation.
Such calculators can be great tools for homebuyers who want to educate themselves prior to taking out a mortgage loan. However, you must keep in mind that these calculators do not take every cost of homeownership into account. Mortgage insurance, taxes, remodeling, and maintenance costs may not be figured into the calculations. Because these costs can really add up on a monthly basis, they should be carefully considered when determining how much house you can afford.
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This page has been accessed 4,300 times. This page was last modified 17:12, 4 November 2008.
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