The Pros and Cons of Fixed Rate Mortgages

Fixed rate mortgages are a popular choice among homebuyers as they provide security of low interest rates throughout the loan’s term. While these may be seen as the gold standard in home mortgages, they come with their own set of advantages and drawbacks, so be sure to understand all details before signing on the dotted line.

The primary benefits of a fixed rate mortgage are its low interest rate and consistent payments throughout the loan term. This can be invaluable when budgeting, especially if you’re thinking about making extra payments on your monthly mortgage payment to pay down principal faster or save on interest charges.

Fixed rate mortgages typically last 15 or 30 years, though shorter terms are possible as well. While a longer mortgage will usually result in lower payments, you could save even more money by taking out a shorter-term mortgage and making sure to pay it off early.

A fully amortizing mortgage – in which both interest and principal are paid off in full over the life of the loan – is the most popular type of fixed rate mortgage. During the initial years, most payments will go toward interest since you’re still repaying your original loan amount; however, as payments increase over time, more and more of them will go towards principal.

Adjustable-rate mortgages (ARMs) are another great option for homebuyers looking to take advantage of lower interest rates. These loans usually feature a lower introductory rate than fixed rate mortgages, but your rates could change as market conditions shift.

Arms also tend to carry higher early repayment charges than fixed rate mortgages. These apply if you make a major payment that exceeds 10% of your outstanding balance or decide to move before the end of your fixed rate mortgage period.

You have two or five year fixed rate mortgage options, but for the best deal look into seven or ten year fixed rate mortgages. While these are the most popular terms available, there is a wide variety of other options to suit your needs and lifestyle.

Your interest rate on your mortgage depends on a variety of factors, such as your credit score, debt-to-income ratio and home’s value. Your lender may also take into account other elements when setting the rate such as down payment amount and type of mortgage you require.

The two most popular fixed rate mortgage terms are 30 and 15 years. For borrowers who are uncertain about their housing commitments, shorter loan periods such as 5 or 7 years might be suitable.

When comparing a fixed rate mortgage with an adjustable-rate mortgage, you’ll also want to take into account the interest rate index used by your lender in setting the interest rate and any ARM exit fees included in the loan package.