What is a Fixed Rate Mortgage?
With a fixed rate mortgage, you’re dealing with the total opposite of an adjustable rate mortgage. A fixed rate mortgage is as its name suggests: a loan with an interest rate that is set from the beginning and will not change at all during the loan term. A fixed rate mortgage gives you a predictable and stable monthly mortgage payment, with total principal and interest staying fixed, allowing you to easily budget for the loan across decades.
There are several main reasons why a fixed rate mortgage can be beneficial over an adjustable rate mortgage. Foremost, if you think interest rates are going to increase in the next few years and want to lock in the current rate, go with a fixed rate mortgage. If you plan to stay in the home you’re buying for the long-term, a fixed rate mortgage is also advantageous. Of course, it can be helpful to get a fixed rate mortgage simply for the peace of mind knowing your monthly mortgage payment will never shift.
Recognize that the longer term you set for a fixed rate mortgage, the higher the interest rate will tend to be and the more you’ll eventually pay in interest (but with lower monthly payments). If you shorten the repayment term, this will increase your monthly payments but lower the interest rate and build home equity faster. Fixed rate mortgages are available in 15 year, 20 year, and 30 year repayment plans.
30 year fixed rate mortgages are one of the most popular in the country as they offer some of the lowest monthly payments available. However, the long-term impact means higher interest payments and slower equity return.
Another alternative is the fixed rate interest-only loan. These have 30 year terms where, during the first 10 years, you have the option to make interest-only payments, or both principal and interest payments. This lowers upfront payments considerably, giving your budget more flexibility to meet immediate cash needs. At the end of the interest-only period, you are required to make only principal and interest payments. Recognize that the benefit of an interest-only fixed rate loan does mean your eventual payments can make it more difficult to refinance or make money if you end up selling the home later on.
