In spring, home buyers will be out scurrying for the perfect place for them to call home. You may be one of them, or may soon be, and you may then be thinking how to finance that home of your dreams. Mortgage brokers have already advised you of your options and you might have already come across the term “fixed rate mortgage” repeatedly, haven’t you? Why are they so popular, when in fact, an adjustable-rate mortgage may be better compared to a fixed-rate mortgage?
A fixed-rate mortgage, also known as a “vanilla wafer” mortgage loan, is a fully amortizing mortgage loan where the interest rate remains the same through the term of the loan. This is in contrast to those loans where the interest rate may adjust. As a result, payment amounts and the duration of the loan are fixed and the person who is responsible for paying back the loan, usually a home buyer, benefits from a consistent and single payment. Generally, a fixed rate mortgage is perfect for you if: you think interest rates are low, you can afford the payment for the house that you intend to buy, you need to budget for monthly payments, and you intend to keep or live in your home for a long period of time.
To make it more clear, fixed rate mortgages are those that have a consistent interest rate for the entire term of the loan. The major plus factor in this type of loan is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. In general, the benefit that a fixed-rate mortgage may provide homebuyers is that there will be minimal, if not completely absent, struggle in having to deal with varying loan payment amounts that fluctuate with interest rate movements. Also, if ever interest rates rise, the adjustable rate mortgage cost will be higher while the fixed rate mortgage will remain the same. Fixed rate mortgages are helpful because they allow the home buyer to predict what housing payments will be in the future because, no matter what happens with interest rates, the payments will definitely not change.
However, some say that fixed rate mortgages are actually more expensive than adjustable rate mortgages. This is because long-term fixed rate loans will tend to be at a higher interest rate than short-term loans. To remedy this problem, loans are now being offered in relatively shorter duration alternatives. The most common are 15-year and 30-year, as well as 40-year and 50-year types, but shorter terms have become very popular these days too.
Outside the United States, fixed-rate mortgages are less used and, in some countries, true fixed-rate mortgages are actually not available except for shorter-term loans. However, here in the US, fixed-rate mortgages are considered as the most classic form of loan for home and product purchasing and is the first choice for most buyers. We also highly recommend getting a fixed rate mortgage over its other counterparts. However, you, the homebuyer will need to remember that a decision should be made based on the loan term, the current interest rate, and the possibility that the rate will increase or decrease during the life of the loan.