Fixed Rate Loans: The Pros And Cons Of Locking Up
Homeownership is a big step and now is the right time to do it. With low interest rates and a wide variety of loan options, home ownership is a dream for everyone. Most buyers rely on a mortgage loan to fund their purchase and just like you search for the perfect home type, you should take the time to research the perfect loan type. Lenders typically offer consumers a choice between fixed rate mortgages and variable or variable rate mortgages. With a fixed-rate mortgage, the interest rate is set when the loan is granted and does not change during the life of the mortgage. This means that the monthly payment will remain the same for the duration of the loan. With a floating rate mortgage, the interest rate fluctuates according to a benchmark index, which causes monthly payments to vary over the life of the loan. Fixed rate mortgage loans are the most common because they are easy to understand and less risky than variable rate loans. Let’s take a closer look at the properties of Fixed rate home loan.
How are Fixed Rate Loans Structured?
Fixed prices are the most popular types of Home loan because of the stability they offer buyers. Fixed rate mortgages are generally available in 15, 20, and 30 year options, with 30 year loans being the most popular option.
A 15-year mortgage has a lower interest rate, but the monthly payments are higher as the loan amount is compressed to just 180 payments, compared to 240 payments for the 20-year mortgage and 360 payments for the 30-year mortgage. A 15 year mortgage allows you to build equity faster because you get into making payments on the principal much faster. The 15 year loan is a great option if you can afford it. However, because your monthly payments are much higher, it is more difficult to qualify for the 15 year loan. For this reason, the 30 year mortgage is the most common. A 30-year mortgage has a higher interest rate than a 15-year or 20-year loan, and you pay more interest over the life of the loan, but your monthly payments are lower than the other options. That means you could borrow more money and end up getting more home for the same monthly rate as a 15-year loan – it just takes longer to repay.
What Are The Benefits Of A Fixed Rate Loan?
Fixed rate mortgages have a number of advantages over adjustable rate loans, including the following:
- Fixed rate: With a fixed-rate mortgage, your interest rate is fixed. It does not increase during the term of the loan.
- Fixed monthly payment: With a stable interest rate, your monthly payment is also fixed and does not change during the term of the loan.
- Simple comparison: Stable interest rates and terms allow you to easily compare the offers from different mortgage banks and to find the financing package that is most suitable for you.
- Use Low Interest: When interest rates go down, you can secure them with low fixed rate loans that take advantage of those interest rates for the life of the loan.
- Flexible Mortgage Term Options: Fixed loans can often be structured so that borrowers have options for mortgage acceleration, repayments, underpayments, and payment vacation options, giving consumers flexibility depending on their financial situation.
What are the disadvantages of a fixed-rate mortgage?
While the security that a fixed rate home loan offers is attractive to homebuyers, there are also some disadvantages:
- Higher Interest and Payments: Floating rate loans use lower interest rates, so fixed rate loans pay more interest and have higher monthly payments.
- Difficult qualification: Since the monthly rates are higher for fixed-rate loans, they are usually more difficult to qualify for high interest rates.
- No introductory period: Variable rate mortgages typically have a fixed introductory period, which is not the case with fixed rate loans.
- Locked in: While fixed interest rates are beneficial when interest rates are low, with a fixed rate loan you cannot benefit from falling interest rates without refinancing the entire mortgage.
There are a number of advantages and disadvantages to a fixed rate mortgage loan. Ultimately, you need to choose the type of loan that best fits your financial situation and allows you to purchase the home that is right for you.