A fixed rate mortgage loan is the easiest available mortgage loan to understand for the first time home buyer. It involves fixed payments, and helps long-term homeowners in planning their budgets and insulates them form ever increasing interest rates.
A fixed rate mortgage has distinctive features such as a permanent rate for long term, consistent monthly repayments and lower risk. The interest rates are calculated when you apply for your loan. These rates are decided by the market. These can also be lowered by paying points up front. Fixed rate mortgage loans provide peace of mind for their holders.
A benefit of fixed rate interest loans is the long-term low monthly payment and inflation hedge. As the cost of living rises the mortgage payment will remain the same. Your salary will also hopefully increase long term, thereby reducing any stress for meeting the mortgage payment and allowing you to save money.
Another attractive feature is the low risk of fixed interest rates. You will not have to worry about rising interest rates. A fixed rate loan can be repaid early, thereby helping you to save money on interest payments.
These loans are conventionally issued for a period of 15 to 30 years, but lately, lenders are offering some new options creative options. The most popular ones are with a period of 30 years due to their low monthly payments.
Other common fixed rate mortgage rate periods are for 20, and 40 years. Theses options also offer potentially lower interest rates, but the monthly payments will be higher by almost 10% when compared to a 30 year mortgage loan. The advantage of these loans lie in the opportunity cost of the savings that would ordinarily be allocated towards mortgage payments. Greater saving can permit lump sum loan repayment before retirement or before the children go to college. A loan for a period of 40 years is not that common but it offers a low monthly payment albeit with a higher interest costs.
These loans come with their share of disadvantages. You might have to refinance to get all the benefits, which would mean that you'll have to spend a good amount of money in closing costs and will have to again visit the finance companies office. Fixed rate mortgage loans can also prove to be extremely expensive for some borrowers, especially for those operating in high interest rate environments because there is no early payment and rate break that can occur with flexible mortgage rates.
Consider all these facts, determine your options and select the loan which is most appropriate to your condition and circumstance.