Fixed Rate Mortgages
What is a Fixed rate mortgage?
A fixed rate mortgage is a loan that has the same interest rate for the entire term of the loan. The key factor of a fixed rate mortgage is that the interest rate is set at the time the mortgage is originated. The primary benefit of a fixed rate mortgage is that the homeowner won’t have to deal with payment variations that fluctuate with interest rate changes.
DOWNSIDE OF A FIXED RATE MORTGAGE
There is a downside to a fixed rate mortgage. Typically a borrower choosing a fixed rate loan program will pay a higher interest rate than someone choosing an adjustable rate mortgage. The borrower is paying a premium in the form of a higher rate in order to avoid future rate increases that are possible on an adjustable rate mortgage (ARM). If the homeowner winds up refinancing, paying off their loan or selling their home within a few years, paying a higher rate to get a fixed rate often results in the borrower paying higher interest costs than if they had chosen an ARM.
TYPES OF FIXED RATE MORTGAGES
Fixed rate mortgages come with varying loan terms. The most common fixed rate loans are a 30 year fixed or 15 year fixed, 25 year, 20 year fixed and 10 year fixed loan terms are also widely available but not as common. Generally the shorter the loan term the lower interest rate you can get. It is important to choose a loan term that fits within your overall financial goals. If your goal is to pay the loan off within a short period of time to correspond with your retirement, a shorter term loan such as a 10 year fixed may be appropriate. If you are buying your first home and have yet to build significant savings for an emergency or retirement a longer term loan such as a 30 year fixed would be more appropriate. There is no one size fits all loan program. It is important to discuss the details of your current situation with your Mortgage Advisor and go through the pros and cons of all options available.