Fixed Rate Mortgages

It seems that fixed rate mortgages would only come with advantages; however, there are some disadvantages associated with this type of financing. So the key to deciding whether this is the route for you to take is to look at how they may or may not benefit you when buying a home.

What You Should Know about Fixed Rate Mortgages

In case you're unfamiliar with fixed rate mortgages, here is a bit of information about what they are and how they work. First, they are defined as mortgages that offer one fixed interest rate throughout the term of the loan. So unlike the adjustable rate mortgage that can adjust periodically, your fixed mortgage will maintain the same monthly principal amount for the life of the loan.

Why People Like Them

The main reason that borrowers buying a home seem to like this type of financing is that they don't have to worry about how much they will pay from month to month. Even better, if they finance while interest rates are low, they can take advantage of a lower monthly premium that won't go up, even if market prices rise.

What Are the Disadvantages of Fixed Rate Mortgages?

Now that you know a little about these types of mortgages, and why people like them, let's take a look at some of the disadvantages they can bring about:

• You can't take advantage of lowered interest rates. While you may be able to jump into the market while rates are low and take advantage of an interest rate that won't rise, if you jump in while prices are high and they lower, you are stuck with the rate you have.
• They work better for long-term financing. If you're planning to stay in the home you've bought for the length of the term, you can benefit from fixed rate mortgages; however, if you plan to leave after a few years, you may actually spend much more than you would with an adjustable rate or graduated mortgage.

Deciding the type of financing you want to take on depends largely on what you plan to do with your property. However, if you think buying a home will result in you sticking around for numerous years, you may want to consider fixed rate mortgages as your choice of financing.

As its name implies, a fixed rate mortgage (FRM) is a home loan where the interest rate remains fixed for the entire term of the loan. Whereas the interest rate on other types of loans, such as an adjustable rate mortgage, graduated payment mortgage, negative amortization mortgage, or balloon payment mortgage may adjust or float, even if they have a fixed period with an introductory rate, the interest rate on a fixed rate mortgage always remains the same.

The fixed-rate mortgage is the traditional form of home financing in the United States, and the one most often used for a home purchase. Common terms for a fixed rate mortgage are 15 year or 30 year mortgages, but shorter or longer terms are available. You can even get up to a 50 year mortgage, in some areas with high priced housing.

Outside of the US, fixed rate mortgages are less common and in some countries, a fixed rate home loan is unavailable, except for a very short-term loan. For example, Canadian mortgage rates typically can be fixed for no more than 10 years, while the maturity on these loans is usually 25 years.

Pricing on Fixed Rate Mortgage Products

Typically, a fixed rate mortgage is more expensive than an adjustable mortgage, both in terms of its interest rate and in the long term. Fixing a rate over the long term is considered a risk to the lender, so they tend to set these loans at a higher interest rate to compensate for rising market interest. The difference between the interest rates for short and long-term loans is called the yield curve. Longer term loans are more expensive, as you pay more interest over the life of the loan.

However, the higher starting interest rate on a fixed-rate loan does not necessarily mean that an adjustable rate mortgage is a better form of financing. If interest rates go up, the rate on the adjustable rate mortgage (ARM) will go higher as well, while the FRM will remain stable. Borrowers who went with an adjustable rate mortgage to save money may find themselves paying far more out of pocket when the adjustment takes effect. You will need to take a look at the loan term, how long you plan to stay in the house, the current interest rate, and how likely you are to refinance later on, to determine which option is right for you.

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