Getting a home mortgage can be difficult.
The amount of detail you have to put into the structure is haunting. The sheer number of opportunities at hand can be confusing and sometimes overwhelming. There are a number of these mortgages. The most popular one is a fixed-rate. This simply means that the interest rate won’t fluctuate over the time you have the mortgage.
What Is A Fixed Rate Mortgage?
This mortgage has a fixed interest rate for the whole length of the loan that is taken out. This is a huge advantage for those who are worried about their interest rates increase or for those who have long-term payments. This also helps with your bills and estimation of bills because the interest rate is stated at the beginning.
The rate is determined before the loan is even taken out. There is no guessing on that. You can use this mortgage to figure out your bills in the next month, and even for the multiple years without worry over if the price will change or not.
Keep in mind:
You can be sure you will pay the same amount each month. In addition, you won’t have to worry if you might pay more next month. These, however, usually come with higher closing costs. It is worth to point out that the 30-year fixed mortgage is one of the most difficult to get approved for. However, if you find you can get around these barriers than a fixed-rate mortgage makes sense for most buyers.
Types, Interest Rate and Suitability of Fixed-Rate Mortgages
When comparing different things, pros and cons arise for each. Our fixed-rate mortgage and an adjustable-rate mortgage also have different benefits and doubts.
With the adjustable-rate mortgage, it could have a larger initial payment advantage as compared to the fixed-rate mortgage. I should note that since it is an adjustable-rate, the interest rate could rise over time. This ultimately can be a worse decision than the fixed rate. You should always compare the pros and cons of both mortgages at the given times. Always take into account the risks involved.
When you get a fixed-rate mortgage, it’s like the mortgage dealer gives you a short-term price rate for the mortgage. Regardless of how interest rates hike or fall, your interest rate remains the same for the deal. So you could end up not paying a lot of money extra due to high interest rates. You could also risk interest rates going down and lose the option to save money.
The Different Types of Fixed-Rate Mortgages
If you agree upon a 5-year fixed mortgage, you should accept the interest rates to not increase or decrease for the entire five years. However, after the five years, the fixed-rate then becomes an adjustable-rate. This creates benefits and doubts. Benefits because the initial interest rate is actually less than a 30-year mortgage.
Doubts because after five years, your rate could increase a lot or a little… again with the risks. One ideal situation for a 5-year fixed mortgage is if you invest and then plan to sell within five years.
Usually, people are drawn to 15-year fixed mortgage rates because they have lower interest rates. You can then pay off the loan amount (not including the interest) faster than a 30-year fixed rate mortgage. But with the benefits, there are also doubts. Be aware that the 15-year mortgages have payments that are higher.
Now when we get to the 30-year mortgages, these are what people really shoot for.
It’s the most affordable. They do have higher interest rates, but that’s okay due to the fact that it’s a 30-year agreement. 30 years is a long time. When you think of the “American Dream”, a 30-year fixed-rate mortgage should come to mind. These are ideal when you know you’re going to be living in the house for a long time.
***Side Note – this can really benefit low-income families. They are able to afford a bigger house that would ordinarily be too expensive for them.***
Finding Your Mortgages Interest Rate
Interest rates are determined by a multitude of things including, but not limited to:
- Prevailing Interest Rates – Since this isn’t an adjustable-rate mortgage (ARM), you are paying the same interest rate for the whole length. This rate is determined by prevailing rates at the time.
- Personal Finances – We all know not to skip and overlook our credit score. We shouldn’t be surprised that a variable of our interest rate is also determined by our credit score. Also, size of the mortgage and down payment play key roles in determination. These interest rates are based on the individuals. Asking others what there’s might be or using a generic table to determine might not help. Check if you need to increase your credit and how to do it.
- Closing Costs – A lot of people choose to pay higher interest rates so that the banks can deal with the closing costs. It’s not rare, and people do it a lot. It is also referred to as a “no-cost loan”. Lookout for this terminology.
- Private Mortgage Insurance (PMI) – You can choose to have lender-paid mortgage insurance or choose private mortgage insurance (PMI). You should expect to pay higher interest rates. The benefit is not having to pay out of your own wallet, and instead of having the bank pay the price to ensure your loan (See how to find the best mortgage lender).
Adjustable Rate Mortgages Vs Fixed Rate Mortgages
Obviously, if a fixed-rate mortgage was better for everybody than the adjustable-rate mortgages wouldn’t exist.
Before we dive in to the pros and cons of the fixed rate mortgage types, let's go over some benefits of adjustable-rate mortgages.
These advantages include:
- If the prevailing rates are already high, go for an adjustable-rate. Odds are the interest rates will be knocked down to a “regular” rate.
- Not planning on staying for a while? Then there’s no sense in getting a fixed-rate mortgage. The cost upfront might be more expensive than for an adjustable-rate mortgage.
- Sadly, if you have bad credit, you could very well not qualify for one of the fixed-rate mortgages (See how to improve your bad credit).
- If you can’t afford the payments of a fixed-rate, but you might be able to in the near future, you might have an easier time applying for an adjustable-rate mortgage. If you want an example, think about not being able to afford the fixed-rate now. However, you could be able to in a few weeks/months when you know you are getting a promotion at work.
Pros and Cons of Fixed-Rate Mortgages
Now, when you know what's the advantages of the main competitor, let's examine the pros and cons of our topic – fixed rate mortgage.
Generally, a fixed-rate mortgage has more advantages than any other, though. These include, but are not limited to:
Knowing Your Payments
Your payments are the exact same. From the first month of the first year to the 11th month of the 28th year. This can benefit you greatly, as you know exactly how much to expect and how much your payments will be each month. You can definitely budget your finances a lot easier for this reason. This also can define your standard of living.
Stable Interest Rates
Imagine you sign a fixed-mortgage rate and then the market for them skyrocket. While this doesn’t benefit others, you get the benefit of paying less for your mortgage. So what if you get upset about the mortgage market dropping a lot and everybody else gets the lower rates? Don’t sweat. You can refinance and then get a better rate!
You should always keep an eye out for the mortgage market. Also, you can really navigate through it and get the best deal. Sometimes you can actually start high and get a huge decrease in your interest rate.
Who doesn’t love saving money? These fixed rates really help. Imagine getting an adjustable rate and the rate increases significantly. This can make the difference between somebody buying the house of their dreams and happily paying it off and somebody drowning in debt.
Paying Down The Principal
This simply allows you to make added-on and extra payments on your principal and not have to worry about fees and penalties.
Ugh… I wish at least one thing on Earth could be “all pros, no cons”. With finance and business? Ha… yeah right. So here is a list of disadvantages to consider also:
Discount points, origination fees, underwriting fees, and closing costs are all upfront costs. These are often higher than other mortgages.
If the Reserve Bank cuts the rates again, those with fixed-rate mortgages might have the short end of the stick. They’ll be paying more since it was decided prior to the interest rate dropping. You can always refinance. This might also bring other variables of difficulties and headaches, though.
High Comparable Interest Rates
Like I said earlier, don’t go for the fixed-rates if you plan to move out in less than five years. You can likely get a better deal with a hybrid adjustable-rate mortgage. If you decide you would actually like an adjustable rate after agreeing to a fixed rate, you might be in for a bad ride. With the fixed-rate mortgages, you have a set term i.e. 15 years. You would then have to stick with it for the entire 15 years. The only exception is if you decided to refinance or something that pertains to refinancing.
Poor credit scorers beware! Since the payments are higher and the upfront costs are more expensive, those with poor credit scores will probably not be approved for a fixed-rate mortgage.
***It’s also worth mentioning that if you want to get out of your fixed-rate mortgage, you will have to pay fees and taxes for breaking the contract.***
Summary – What Is Fixed Rate Mortgage And Why You Should Consider It?
The “American Dream”, the 30-year fixed-rate mortgage.
The most popular and sought out a mortgage in the competition. It’s the most popular because you know what you pay. If you plan to get married and raise children or to just live in a house for nearly a lifetime, this provides you with rates upfront. This enables you to benefit with budgeting. Not to mention, it can help families and those who earn lower incomes. It’s good to point out that we are observing more and more people not living in houses for a lifetime. The overall idea of houses and living quarters are changing dramatically with generations.
How to start?
Go through what you and your family want/need. Determine what’s best for you. Most of all: go through all of your options thoroughly and in detail. Also, look into the benefits of hedging your bets to consider fixed rates as apart of your mortgage. This permits you to have the safety of a fixed-rate mortgage with the flexibility of an adjustable-rate mortgage.
A lot of home loans give you the option of having a split loan. This means one portion is variable, and the other portion is fixed. These splits are all different. The most common is a 50% variable and a 50% fixed- right in the middle. Doesn’t that make your OCD as happy as it makes mine?
As I said, fixed-rate mortgages typically benefit most. Nonetheless, there are a few exceptions. Determine if you are one of these exceptions. Then go about all of your options. Write them down. Pay attention. Ask details. Increase your chances to get a mortgage. Schedule meetings.