Fixed Rate Mortgages / Fixed Rate Loans
The fixed rate mortgage has long been the most popular home financing product. With an interest rate that never changes, it provides stable, predictable monthly payments throughout the life of the loan. Fixed rate mortgages can be good for first time buyers and anyone on a budget who needs the stability of a set monthly repayment. When you refinance with a fixed rate mortgage you have the security of knowing the exact amount you will repay each month will not change. This is important if you plan on staying in the home for a period longer than five to seven years
The traditional fixed rate mortgage is the most common type of loan program, sometimes referred to as the plain vanilla loan, where monthly principal and interest payments never change during the life of the fixed rate mortgage. Fixed rate mortgages are available in terms ranging from 10 to 30 years and can be paid off at any time without penalty. This type of mortgage is structured, or “amortized” so that it will be completely paid off by the end of the loan term.
Things You Should Know About Fixed Rate Mortgages
A fixed rate mortgage (FRM) is a type of loan often used to finance personal possessions and assets. The interest rates in FRMs remain the same for the entire term of the loan, but other charges such as insurance and property taxes may apply as well. Interest rates in FRMs are determined at the beginning of the contract, and may be a share of between 12.5 and 25 percent.
Fixed rate mortgages are the counterpoint to adjustable rate mortgages (ARM) in which interest rates fluxuate and are determined by economic indexes.
FRMs vs ARMs
Fixed rate mortgages are generally more expensive than adjustable rate mortgages because the financial risk of an unfavorable economy is on the lender. On the other hand, a great ARM can turn sour when it suddenly shoots up in price at a moment’s change in the economic barometer. In the long run, both loans are a gamble. The FRM has a higher rate but offers protection from economic downturns, while the ARM can offer great savings as long as the economy remains favorable.
Benefits of Fixed Rate Mortgages
FRMs are less-risky: With a fixed rate mortgage, you always know what mortgage payment you will need to make, regardless of the prevailing interest rate in the market. This makes fixed rate mortgages a good solution for first time buyers who may not be as experienced at predicting market cycles.
FRMs provide protection from inflation: With a fixed rate mortgage, the interest rate does not increase with an increase in inflation. This is especially beneficial for long-term loans that could be negatively impacted by many years of slowly increasing market prices.
Is a Fixed Rate Mortgage Right for You?
Fixed rate mortgages are not for everyone. When considering a fixed rate mortgage, it is important to remember that payments will increase when the second period of the mortgage begins and the fully amortized rate is due. Prospective borrowers should be aware of this second period rate and be able to plan for it financially before taking out an FRM.
These are just a few basic things you should know about fixed rate mortgages. Whether or not to take out an FRM depends on your individual financial situation. For more information regarding fixed rate mortgages in, talk to your mortgage broker.
