A mortgage having a fixed rate of interest throughout the entire loan term is referred to as a Fixed Rate Mortgage. Thus, the duration of a loan and the payment amounts are fixed and the individual responsible for paying off the loan benefits from a single, consistent payment. Fixed rate mortgages loans are quite common for mortgages, home equity loans, and car loans. Also, since these loans offer predictable and straightforward monthly payments, the certainty allows you to plan your budget rather easily.
Fixed rate mortgage loans are great for people who plan to budget their repayments as knowing exactly how much you’re required to pay helps you prepare accordingly, providing you with a sense of predictability and security.
The Pros and Cons of Fixed Rate Mortgage Loans
One of the main benefits of adopting this type of loan is that potential home buyers are fully aware of exactly how much they will be paying as a monthly installment throughout the duration of the loan. This contrasts significantly with the behavior of adjustable loans.
With fixed rate mortgage loans, borrowers are also provided with the advantage of possessing emotional security which cannot be obtained through adjustable rate mortgages or ARM loans. That’s because borrowers with an adjustable rate mortgage will always have to wonder about their home’s future payments (there are even cases where this has led to colossal problems afterwards). The interest rates in some of these adjustable rate mortgages can be so great that the house owner cannot pay them off and may have to succumb to foreclosure, relinquishing the home along with the equity that’s gradually been built up within it. On the other hand, borrowers of fixed rate mortgage loans rarely face this kind of situation.
Though fixed rate mortgage loans have their advantages, there are certain disadvantages associated with them as well. For example, for buyers who lack excellent credit rating, this type of loan can be rather difficult to obtain as compared to the adjustable rate mortgage. This may not always be the case, but lenders usually look forward to working with buyers possessing good credit within the field of fixed rates.
Another con associated with this type of loan is that if interest rates drop on the whole; the borrower may find themselves paying a lot more than what others at a lower rate are bound to pay. And the only way to actually adjust this kind of mortgage is through refinancing. This can be rather costly for a home owner. However, in some cases, refinancing is a great idea and should be looked into by the buyers. Also, fixed rate mortgage loans have a somewhat limited scope. This means that you could end up with fewer options through a fixed rate when compared to the mortgages provided at an adjustable rate.
A fixed rate mortgage loan is an easy, well defined, and understandable way of financing your home. Buyers who wish to know the exact amount of payments that need to be made during the entire course of a loan should really look forward to this kind of financing. If you possess fairly good credit and are planning on living in the same house for a long time, then fixed rate mortgage loans may be the best thing that ever happened to you.
Fixed Rate Loan Types
Following are the types of fixed rate loans:
Unlike the usual fixed rate loan, biweekly loans require payments that need to be made twice a month, i.e. every two weeks. This means that you get to make a total of 26 payments a year instead of twelve. Through a biweekly fixed rate mortgage, you can pay off your loan much quicker as the amount of payments you make will be doubled.
This type of fixed rate mortgage loan features two periods of loan payment. During the first period, you get to make a lower payment as there will be no principal included and you’d only be paying the interest whereas both will be paid during the second period. For example, in an interest-only fixed rate mortgage of 15 years, you’ll only be paying the interest for the first 5 years and then both principal and interest for the remaining 10.
Usually, fixed rate mortgage loans are recommended for individuals who possess a steady and predicable source of income, planning to own their home over an extended span of time. The predictability and simplicity of fixed rate mortgage loans makes them a rather popular choice among first-time buyers.