A fixed rate mortgage is when the interest rate is decided upon the signing of the mortgage contract and remains the same throughout the tenure of the mortgage. In a fixed rate mortgage, the borrower can know exactly what his payment plan is going to be since the installment is going to remain fixed throughout.
The borrower will know exactly how much he has to pay and how long it is going to take him to finish making the payments on the mortgage. The installment amount every month remains the same as well.
Fixed rate mortgage usually comes in 2 most common variations of 15 years or 30 years. Other permutations of 20 years or 25 years also exist, but are usually not used since the 15 year term and 30 year term offers the most benefits.
Advantages of a Fixed Rate Mortgage
Since the interest rate does not determine on the economy, the payments remain constant all throughout the length of the mortgage even if the interest rate increases in the future. It works to the advantage of the borrower if he takes a fixed rate mortgage when the interest rate is low in the market. If the borrower gets a good deal, he can be sure to take full advantage of it right till the end of the mortgage period.
A fixed rate mortgage makes good sense for someone who needs to budget his home purchase and wants to know exactly how much he will me paying towards the home loan. This makes financial planning for other expenses and requirements all the more organized.
Should You Choose a Fixed Rate Mortgage?
You should discuss your particular situation with a talented and helpful lender. Generally, you’ll find that fixed rate mortgages are the right choice if:
- You think interest rates are low
- You can afford the payment for the house you want
- You need to budget for and predict monthly payments
- You will keep your home for a relatively long period of time
Fixed mortgages might come at a higher price than other kinds of mortgages when you sign up for them. The interest rate that you are getting might be higher than the ones currently offered on variable rate mortgages.
However, just because the interest rate is low on a variable rate at present, does not mean that it will not shoot up in the future. You pay additional costs and a higher rate of interest for the luxury of having a fixed payment through the mortgage in spite of the fluctuations that might occur in the market in the future.
Additional costs built in to a mortgage are called closing costs. If you want to be a smart borrower, ask the lender to present you with an itemized list of all processing charges and costs. You can then negotiate over these extra costs and even have the lender do away with a few all together.