Fixed Rate Mortgages

A fixed rate mortgage is one in which the interest rate remains the same throughout the life of the loan or at least for a specified period of time. For instance, the interest rate on a 30 year loan with a fixed rate of 5% would be 5% for the entire 30 year period of the loan. A fixed rate mortgage might also only be fixed for only a period about of time, for instance, four years and then switches to a variable loan.

There are both advantages and disadvantages associated with a fixed rate mortgage. It is important for individuals to consider both before deciding whether or not to finance ones home with this type of rate. We’ll discuss the advantages and disadvantages of fixed rate mortgages below.

Advantages

1. The ability to determine monthly payments: When a person has a fixed rate mortgage, they will know exactly how much their monthly mortgage payments will be. This is great for people who like to plan and who would like to know exactly how much money is coming in and going out.

2. The ability to better plan financially: It is easier to make financial plans when a person knows how much their monthly payments are. If for example, a person’s home was financed using a variable rate loan, it could be difficult for them to make financial plans over the next few months or year because they will have no idea how much money they will be paying for their mortgage. People with a fixed rate do.

3. No sudden jumps in payments: The beauty of a fixed rate mortgage lies in its predictability. There are never any sudden increases in payments like there will likely be with a variable loan. This can be very comforting. A person knows that over the life of their loan, they will pay the same amount of money and never have to worry about sudden hikes.

4. The ability to lock in a great rate: being able to lock in a great rate is why many people opt for fixed rated mortgages. Sure, there’s a chance that rates may drop but there’s also a chance that they will rise, which would increase an individual’s monthly payments, something that no one wants.

Disadvantages

1.The inability to take advantage of low interest variable rates: One of the biggest knocks on a fixed rate mortgage is the inability to take advantage of the low rates sometimes available via variable rate loans. Variable rates rise and fall. They can be very beneficial in this way. The converse is also true. They can also be very expensive and costly. When the rates are really low, a fixed rate mortgage starts not to look so attractive.

2. May be stuck with a high interest rate: One of the biggest disadvantages of going with a fixed rate mortgage is the possibility of being stuck with a high interest rate. If a fixed rate loan was secured during a time when interest rates were high, a person’s interest rate might be higher then the current average. Refinancing in order to secure a cheaper rate may or may not be possible. A person should, however, investigate this option in an effort to secure a better rate.