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Is A Fixed Rate Mortgage Your Best Bet?

By Ann White

Choosing a mortgage can be one of the most challenging experiences of the home-buying process. However, there are a few key differences between mortgage types that can save you thousands of dollars over the life of the loan.

Fixed-Rate Mortgages – The Basics

A fixed-rate mortgage in one where the interest rate is fixed for the term of the loan, meaning the monthly payment for the loan will also remain fixed. This is the greatest attraction to budget-minded homebuyers who are on a steady income and don’t want to risk an increase in mortgage payment later on. There are several terms available for fixed rate mortgages, typically ranging between 15 and 30 years, although 40 year loans are also available. Typically, the longer the term of the loan, the lower the interest rate.

Caution on Adjustable Rate Mortgages

Some buyers may find a greater advantage in an Adjustable Rate Mortgage (ARM). In an ARM, the interest rate fluctuates according to market trends. Buyers should carefully study the terms offered in an ARM to determine how often the rate changes, by how much, and whether they can afford the payments if the interest rate rises. The beginning interest rate, or “teaser”, is typically much lower than that of a traditional 30-year fixed rate mortgage, and this advantage may allow the buyer to purchase a home that is unaffordable under a fixed rate mortgage. Buyers should note, however, that payments over the life of the loan can balloon to a point where the property is no longer affordable. If the value of the property drops in value, this can create a situation where the house is unsellable.

Interest-Only Loans – Not For Everyone

Interest-Only Loans have been very popular in recent years, due to continued low interest rates and rising property values. An interest-only mortgage, simply put, is a loan where a certain amount of interest on the principle loan amount is due each month, which is typically much less than a traditional fixed rate mortgage. For buyers whose income fluctuates from month-to-month, this can be a viable option. In lean months, only the interest payment can be made, whereas during months where income is high, a sizeable chunk of the principal can be paid down. The downside is that, eventually, the buyer will have to pay off the loan balance, and the change in monthly payment can be shocking.

So What Do I Do?

In the end, it is up to the buyer to make an educated decision on which mortgage fits their budget. The choice should depend on several factors, including the interest rate, employment and income prospects for the future, how long the buyer will stay in the home, and how much risk they’re able to withstand. Adjustable rate and Interest-Only mortgages typically carry far more risk than a fixed rate mortgage. For most families on a fixed or regular income, a traditional fixed rate mortgage is the safest bet, especially when interest rates are low and property values remain unsteady.

Related posts:

1. Do Buyers Prefer Fixed-Rate Mortgages in Today’s Market?
2. Is a 50 Year Fixed Mortgage Really a Good Idea?
3. Why Do Most Homebuyers Prefer A Fixed Rate Mortgage?
4. How Can I Take Advantage of the Best Fixed Rate Mortgage Deals?
5. Can A Fixed Rate Mortgage Be Beneficial When Buying A Home?