Fixed Rate Mortgage Loans: Pros and Cons
Fixed rate mortgage loans are the most common type of loan for new home buyers. Since the interest rates are stable, long term homeowners can budget their finances accordingly because they will be safeguarded against rising interest rates. Along with fixed rates that are determined by the market, this type of loan involves little risk and offers long term low monthly payments that are protected from the effects of inflation.
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Though appealing to most, fixed rate mortgage loans aren’t for everyone. Other types of mortgage loans allow you to borrow more than you could with a fixed rate mortgage. If your stay in the home that you are borrowing against is short in tenure, then you would probably end up paying more in interest than you would if you chose a variable rate mortgage. Finally, with fixed interest rates, you are committed to that rate for the duration of your mortgage, even if the market rate drops sometime in the future.
The main alternative to fixed rate mortgage loans is the adjustable rate loan or ARM. An ARM carries a lower interest rate than a 30 year fixed. However, the interest rate adjusts based on current interest rates. This means that a borrower could get a 5 year ARM that is 50% less than the 30 year fixed but it can adjust over the next 3 years up to the same rate as the 30 year and then go higher over the final 2 years. Obviously, it can also stay lower than the 30 year as well. An ARM is a riskier loan scenario that is a good option when interest rates are low and a borrower knows that they are only in their current home for a few years.
For more information on fixed rate mortgage loans and whether your should refinance your mortgage, see our Mortgage Refinance Calculator.