Understanding Fixed-rate Mortgages

A fixed-rate mortgage is a mortgage on which the interest rate is set for the term of the loan. Your interest rate stays the same for the term of the mortgage or for a specified period of time. Most people use a fixed-rate mortgage. In fact, about 75 percent of all home mortgages have fixed rates. The main advantage of a fixed-rate mortgage is that you always know exactly how much your mortgage payment will be, and you can plan for it.
A Fixed Rate mortgage will offer you the security of knowing that your mortgage interest rate will not change during the term of your fixed rate. For example, a lender can offer a 30-year fixed loan to a homebuyer at a 6.5% interest rate. The loan is locked in to the 6.5% interest rate, even if the market interest rate rises to 8.0%. Conversely, if the market interest rate decreases to 4.5%, you will continue to pay the 6.5% interest rate. A Fixed-Rate Mortgage applies the same interest rate toward monthly loan payments for the life of the loan.
Features:
– Straightforward and easier to understand than Adjustable Rate Mortgages (ARMs).
– More secure for the buyer and very popular with first-time home buyers.
– Ideal for anyone who likes to budget monthly expenses and plans to keep their home for several years.
– Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than Adjustable Rate Mortgages (ARMs).
– Tend to have higher initial monthly payments compared to those of adjustable rate mortgages.
– Fixed-rate mortgages are less flexibility than adjustable rate mortgages.
With adjustable rate mortgages the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. The advantage of an Adjustable Rate Mortgage is that you may be able to afford a more expensive home because your initial interest rate will be lower. In a fixed-rate mortgage, your interest rate stays the same for the term of the mortgage.