Buying a home can be a fulfilling experience. But it can also become a challenging undertaking, especially if you don’t have enough cash to cover the expenses. Fortunately, there are ways that can help you own a house without spending more money. One of these ways is through a fixed rate mortgage.
However, just like other types of first-time home loans, determining whether a fixed rate mortgage is the right financial solution for you can be difficult. There are things that you need to consider to determine if it’s what you really need for your home purchase. In such a case, talking to a mortgage expert can be a good idea to assist you in obtaining a home loan that meets your needs.
Meanwhile, keep reading this article to have a better understanding if a fixed rate mortgage is right for you.
What Is A Fixed Rate Mortgage?
Essentially, a fixed rate mortgage refers to a mortgage loan wherein the interest rates on the note are fixed for the whole term of the loan. This means that the mortgage would come with a consistent interest rate from start to finish, instead of the ones which may adjust or float over a period of time.
Because of this, many borrowers who want to know how much they need to pay for their mortgage each month prefer this type of loan. If you want to know more about fixed rate mortgages, you can check out some reliable online websites for more information.
Is A Fixed Rate Mortgage Right For Your Needs?
To know whether getting a fixed rate mortgage is the right decision to make, it’s important to weigh and understand the pros and cons. By doing this, you would come up with an idea if this type of home loan can be an excellent solution for your personal situation.
The following are the advantages and disadvantages of a fixed rate mortgage:
To most homebuyers, getting a fixed rate mortgage can be beneficial in a variety of ways. These can include:
- Predictability: As mentioned, a fixed rate mortgage comes with constant interests. This means that the amount you owe from the beginning of your loan never changes. As such, you can expect a sense of predictability about the amount of principal and interests rates you’re going to pay for your fixed rate mortgage.
- Stable interest rate: Even if there are some market fluctuations, your interest rate remains stable and will never change. In other words, no matter what happens in the market, the rate you’re paying will stay the same.
- Ability to pay principal: With a fixed rate mortgage, you’re also allowed to pay down the principal amount of your loan without incurring any fees. This means it doesn’t come with restrictive pre-payment penalties, allowing you to make extra payments on the principal during the duration of your mortgage.
- Variety of loan terms to choose from: Just like other types of home loans, a fixed rate mortgage also comes with a variety of terms. For instance, you can pick between 10, 15, 20, 25, and 30-year terms, which allows you to determine which payment period would perfectly suit your needs.
- Easy comparison: Shopping around for the right fixed rate mortgage is much easier and faster because you can opt to compare two interest rates based on the same payment terms. In short, you don’t have to make complicated calculations before you can compare one from another.
Although getting a fixed rate mortgage for your home purchase can be a popular option, it doesn’t mean it’s the best for your unique situation.
Here are some drawbacks you should keep in mind:
- Strict eligibility requirements: Applying for a fixed rate loan requires strict eligibility requirements. For example, you may not qualify if you have a poor credit score since lenders consider it as a primary factor for eligibility. Also, if you have plans of making small payments, you may have fewer chances of getting a successful loan approval.
- Need for refinancing to obtain a lower rate: Typically, if the interest rates start to go down, other borrowers would start to enjoy paying lower rates. But with a fixed rate mortgage, you may have to refinance your loan, and it’s costly to reduce your interest rates, making repayments easier and cheaper.
- High starting rate: Due to the predictability offered by a fixed rate mortgage, you may have to deal with a higher interest rate for a few years.
- High upfront costs: When you get a fixed rate mortgage, you would more likely have to pay a variety of expensive fees. These can include underwriting fees, origination fees, and other related costs.
- Locked-in interest rate: Since you can’t predict when the interest rates would go up and down, dealing with a locked-in interest rate in a fixed rate mortgage can be a bit stressful. This is especially true if you’re dealing with a high rate and then it decreases but can’t do anything about it.
What Are The Personal And Financial Factors Affecting Your Decision?
Aside from the pros and cons, it’s also essential to consider some personal and financial factors that can affect your decision to apply for a fixed rate mortgage. In short, there may be instances wherein this type of home loan doesn’t do good, but it may harm your financial health. These can include:
- You’re only planning to live and stay in the home you’re going to purchase for a few years;
- You’re looking for a home loan that offers a lower starting interest rate;
- You have a poor credit score or you only want to pay a small amount of down payment.
As enumerated, there are many reasons that can help you decide whether to obtain a fixed rate mortgage or not. Depending on your situation, you can also find out if this type of home loan is the best one for you. So, to help you with the selection process, it’s best to speak to an expert for more valuable advice.
Indeed, a fixed rate mortgage can be a popular choice for anyone who’s buying a home. However, even if it’s preferred for its popularity, it doesn’t mean it’s the right type of home loan for your needs. Therefore, if you want to ensure you make the most suitable decision, keep this information in mind, and you will know if it’s ideal for your situation.
Danis Woods in Businessman, investment banker and stock exchange traders. On the same time he loves writing financial blogs to shed lights on different aspects that new and existing businessman are not aware of.