Advantages & Disadvantages of Fixed Rate Mortgages
When choosing a mortgage, you need to consider a wide range of personal factors and balance them with the economic realities of an ever-changing marketplace. In any long-term scenario an individual’s personal finances often experience periods of advance and decline, interest rates rise and fall, and the strength of the economy waxes and wanes. To put your loan selection into the context of these factors, consider the following questions:
- How large of a mortgage payment can you afford today?
- Could you still afford a larger payment if interest rates rise?
- How long do you intend to live on the property?
- In what direction are interest rates heading?
- Do you anticipate that interest rate trend to continue?
Fixed Rate Mortgage Basics
A fixed-rate mortgage locks in an interest rate that you select at the time you arrange the loan. That rate remains the same throughout the life of the loan, regardless of what happens to interest rates or inflation. With a fixed-rate mortgage, the amount of principal and interest paid varies from payment to payment; but the total payment remains the same.
Fixed-rate mortgages are often preferred over adjustable-rate mortgages (ARMs) since they are more straightforward, easier to understand, and are more secure for the buyer. Fixed-rate mortgages are available under a variety of terms, but regardless of the term of your loan, your interest rate will also be impacted by a range of factors. Considerations include your credit score, how much money you’re borrowing, the value of your home, the term of your loan, where your home is located and the size of your down payment. However, fixed-rate mortgages generally have higher interest rates than ARMs since the lender’s risk is higher.