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What is a fixed-rate mortgage?
Ever wondered what a fixed-rate mortgage was and why people get them? Find out the answers here.
By: Vivian Xia
Mortgages
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Buying a house can be a grueling process that usually involves getting a mortgage. When shopping around for mortgages, you may be presented with many different kinds of mortgages, with one of them being a fixed-rate mortgage. A fixed-rate mortgage is a mortgage with an interest rate that stays the same throughout the life of the loan. This type of mortgage is popular among homeowners because it provides predictability and stability.

Term lengths

Fixed-rate mortgages usually have higher interest rates and come in terms of 15, 20 or 30 years. The 30-year mortgage is the most popular choice, as the monthly payments are lower. However, the interest rate is higher and you will pay more money overall due to interest over the long time period. 

On the other hand, with shorter-term mortgages like the 15- and 20-year mortgages, you will save money on interest and pay a lower interest rate, but your monthly payments will be higher. The lower interest rate allows a larger portion of the principal to be repaid each month, which results in a much lower overall cost.

Pros and cons of fixed-rate mortgages

Fixed-rate mortgages are often compared to adjustable-rate mortgages, which have variable interest rates and are typically more complicated. The initial interest rate for an ARM is set lower than the market rate on fixed-interest mortgages, which may make fixed-interest mortgages seem less attractive. 

Additionally, ARMs have a fixed period of time during which the initial interest rate stays the same, so the initial monthly payments are lower than those of fixed-interest mortgages. The lower initial payments also make it easier to qualify for loans. However, the interest rate rises as time goes on, and it may even rise above interest rates for fixed-rate mortgages if enough time passes.

As mentioned earlier, a big advantage of fixed-rate mortgages is that they provide homeowners with predictability and stability regarding the total amount of money you will pay. Although monthly payments may vary, the total amount you pay remains the same, so you can easily budget when paying off the mortgage. 

Additionally, if interest rates rise significantly, the borrower is protected from this and does not have to pay more in their monthly payments. Fixed-rate mortgages also vary little between lenders, which makes them easier to understand.

Should I get a fixed-rate mortgage?

When choosing a mortgage, you need to consider many different factors. Since ARMs are initially cheaper, you should first see if you can still afford an ARM if interest rates rise and consider the worst-case scenario. If not, you may want to look into a fixed-rate mortgage instead to minimize risk. 

Current interest rate trends are a very important factor in deciding whether to get a fixed-rate loan. If interest rates are currently rising and are expected to continue rising, you should consider getting a fixed-rate mortgage. 

You should also take into account how large a mortgage payment you can afford right now and how long you plan on living on the property. If you cannot afford a fixed-rate mortgage payment at the moment and/or don’t plan on living on your property for very long, a fixed-rate mortgage may not be a great choice.

Your financial situation is another key factor in that if you have a stable income but don’t expect it to increase significantly, you should go with a fixed-rate mortgage. Having a stable income allows you to pay off your mortgage slowly and steadily, but if your income is expected to increase, an ARM would make more sense because then you can use the extra income to pay it off quickly.

Conclusion

Fixed-rate mortgages are mortgages with fixed interest rates. They often come with term lengths of 15, 20 or 30 years, though most people choose the 30-year term length. Longer term lengths often mean a higher overall cost but lower monthly payments, while shorter term lengths can save you a lot of money on interest, but you would also have to pay more money each month. There are many advantages of a fixed-rate mortgage in that it provides stability and predictability regarding how much you will pay, and borrowers are protected from potential increases in interest rates. However, initial interest rates and monthly payments on fixed-rate mortgages tend to be higher, which also makes it harder to qualify for loans.

There are also many factors that should be considered when getting a mortgage. Some of these include current interest rate trends, how much mortgage you can afford to pay right now, how long you plan on living in your home, how long you plan on paying the mortgage off, your financial situation and whether you can afford an adjustable-rate mortgage if interest rates rise. Ultimately, your decision should be based on your situation and priorities. You should always make your choices wisely and make sure you are properly informed before doing so.

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