With adjustable rate mortgages, your interest rate changes periodically over the term of your loan, but with fixed mortgages your interest rate is fixed and will never change. This means that the interest rate you lock in on the day you purchase your loan will be the same interest rate that you have when you make your final payment. Because the interest rate never fluctuates, your monthly mortgage payments will always remain the same for the interest and principal combined (payments may fluctuate slightly if property taxes or homeowner's insurance is included).
Pros and Cons of Fixed Rate Mortgages
Fixed rates are often the preferred mortgage rate because they provide a sense of security and predictability that adjustable rate mortgages can't offer. However, there are certain circumstances where an adjustable rate can save you money.
If you are trying to decide whether or not a fixed rate mortgage is for you, consider:
Pros of a Fixed Rate
- Interest rates do fluctuate and the amount is dependent on government agencies. If the average interest rates go up, those with a fixed rate don't have to worry.
- Consistent payments make every day budgeting easier.
- Unlike adjustable rate mortgages, fixed rate mortgages are easy to understand. There are no indexes, margins, fluctuations, or caps.
- When interest rates are low, fixed rates can be very affordable and you can lock yourself into a very low rate that will never change.
Cons of a Fixed Rate
- Fixed rates are not flexible. They can't be customized to a borrower's individual financial situation.
- The initial cost of some fixed mortgages is higher than the initial cost of an adjustable rate mortgage because there are no deals, such as early rate and payment breaks.
- Fixed rates are locked in at the time of the loan purchase. If a borrower wants to take advantage of falling interest rates, refinancing is a must.
15 Year vs. 30 Year Loans
When you get a fixed rate mortgage, you generally have two term lengths to choose from, either 15 or 30 years. For some people, a 15-year fixed mortgage is the better choice because it allows you to pay less interest over the life of the loan. Equity also builds faster because you are paying off the loan in a shorter amount of time. However, the monthly payment for a 15 year loan is much higher and can make it harder to purchase a more expensive home.
A 30-year fixed rate mortgage has advantages, such as the ability to borrow money over a long term, lower monthly payments, and higher interest deductions during tax time.
Mortgage Calculators
One of the easiest ways to choose rate types and mortgage terms is to determine how much you want to spend on a house and how much you can afford on a monthly basis. Sit down with your mortgage broker and run the numbers for various loan options. Consider how long you plan to be in your home and how your financial situation might change. If this is your 3rd home and you plan to live in it for 10-plus years, a fixed rate makes a lot of sense. However, if it is your first home and you know you want to size up in a few years, it could be cheaper to get an adjustable rate loan and refinance with your next home.
If you need help running the numbers, try LoveToKnow's mortgage calculator below.
Educate Yourself
Using calculators can be great tools for homebuyers who want to educate themselves prior to taking out a mortgage loan. However, you must keep in mind that these calculators do not take every cost of homeownership into account. Mortgage insurance, taxes, remodeling, and maintenance costs may not be figured into the calculations. Because these costs can really add up on a monthly basis, they should be carefully considered when determining how much house you can afford.
