What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a mortgage with an interest rate that does not change during the term of the loan (i.e. it remains fixed). They are the most uncomplicated mortgage options available to homeowners–they remain constant, so you always know how much you will be paying. This is the common alternative to the adjustable-rate mortgage (ARM), which has a interest rate that varies periodically depending on the interest rate index that your ARM is tied to.
When should you use a fixed-rate mortgage?
The attractiveness of a fixed interest rate is that your monthly mortgage payment remains constant throughout the duration of your mortgage term. The stability of a fixed-rate mortgage makes it easier for homeowners to budget their monthly expenses, and be worry free when there is volatility in the market that affects interest rate payments negatively. Generally, a fixed-rate mortgage is beneficial for those who intend to live in the home for the foreseeable future and have the financial means to pay off the mortgage. However, it’s advisable to stay up to date with interest rates news and refinance your mortgage should a better fixed-rate interest comes along.
When shouldn’t you use a fixed-rate mortgage?
Mortgages that have fixed-rates are tied to a constant loan interest rate. Thus, should the market’s interest rates go down (as a fixed-rate mortgage homeowner), you will not benefit unless you refinance your home. In situations where interest rates drop often, having an ARM is much more attractive than having a fixed-rate mortgage– however, this is a gamble as it is hard to predict how interest rates will behave in the future. The general rule of thumb is, if you aren’t planning on staying in the home for a lengthy period of time and the current interest rates seem to be low and dropping– then a fixed-rate loan isn’t for you.
Fixed-rate mortgages are good for those who want to have a set and solid plan. Financially, fixed-rate mortgages are better for budgeting your monthly finances and give you more financial stability without any surprises. One thing you want to be mindful of with both fixed-rate mortgages and ARMs is: know how long you plan to stay in your home for and keep up to date about the market’s interest rates. This will help you to make the necessary decisions pertaining to your own circumstances in order to make any adjustments that you need.
Was this article helpful? Leave a comment below.