A fixed-rate mortgage is a home loan with a rate that stays the same for the entire term of the loan. What this means for you, the borrower, is that your monthly payment covering loan repayment and interest will remain steady throughout the length of the loan.
When you apply for a mortgage, you may have the option to choose between a fixed-rate or an adjustable-rate mortgage. Below is an overview of fixed-rate mortgages that includes information on term length, benefits, and factors that may impact your rate.
You can choose different lengths of time, or terms, to pay off a fixed-rate mortgage. Common terms include:
Many people prefer 30-year loans because of the lower payment. This allows you to allot more of your monthly income to other things, such as paying off high-interest credit card debt or student loans.
A shorter loan term may be preferable for those with more cash flow. If you want to pay off your home faster, you may consider a 15-year loan.
The greatest advantage of taking out a fixed-rate mortgage is predictability. When you lock in a fixed rate, you protect yourself against market volatility that can increase monthly mortgage rates when you take out an adjustable-rate mortgage. Too many people get caught off-guard by these increases. They may not have planned for the rise in loan payments, which can compromise their monthly budgets and lead to cash flow issues.
Your housing expense is often one of the larger ones in your monthly budget. Knowing that your fixed-rate mortgage payment will be the same each month makes long-range budgeting easier.
If you take out a fixed-rate mortgage and find yourself with extra cash available, whether it’s due to a decrease in other debt or an increase in income, most lenders will allow you to make extra payments toward the principal of the loan. This gives you the stability of a fixed interest rate while having the ability to contribute extra toward your mortgage if you want. Even small additional payments can have a large impact on reducing how much interest accrues on the loan.
Several factors will impact the rate of your loan and may include:
In many cases, fixed-rate mortgages offer the best value for homebuyers. The steady payments and predictability make budgeting easier.
In some cases, however, an adjustable-rate mortgage (ARM) may be preferable. Getting a fixed-rate mortgage may limit the amount you can spend on a house because you’ll pay a higher interest rate to start and have a higher monthly payment. A bank or credit union considers this when approving you for a mortgage. For those who want a higher-priced house, an ARM may be preferable.
Also, if you don’t plan to live in your home for more than a few years, an ARM may be a better choice. That’s because in the early years of either a fixed-rate or adjustable-rate mortgage, most of your payment is applied to interest rather than to the principal. So the lower interest rate of an ARM can mean that you’ll spend less on interest for the first few years.
For more information on buying a home, check out our WalletWorks page.