Locking In Your Future Payments
When it comes to fixed mortgage basics, the greatest benefit for homebuyers is peace of mind. You get a little bit more of that when you do not have to worry about your payments escalating when interest rates rise. As long as interest rates remain low fixed rate mortgage financing is bound to be very popular. Of course, if and when interest rates rise, anyone who already has a fixed mortgage is going to be feeling pretty good but, as interest rates climb to the peak of the economic roller coaster, fear will drive new buyers out of the market.
The peace of mind you get from fixed mortgages comes from the certainty that the interest payments in your budget for the upcoming year are going to be predictable. Once the rate is locked-in you don’t have to worry that your payments are going to go up, unless you make the choice to pay off some extra principal and reduce the term of your loan.
The Two Terms Of Fixed Mortgages You Need To Know About
As a borrower intent on securing a fixed rate you have one major decision regarding your fixed rate home loan and that is the term of the loan. Fixed mortgages are usually either 15 or 30 years in length. The monthly payments on a thirty-year mortgage will be less expensive but not by as much as you might expect.
The shorter-term, fifteen-year loans have a lower interest rate and if you do choose the longer term it takes a considerable time to accrue any significant equity in your home. The first few years will be taken almost entirely by interest charges, with only a sliver contributing to principal.
Fifteen-year terms do build equity more quickly, however the larger payments they require are often beyond the reach of borrowers unless they are willing to compromise on the value of the home that they buy. Over the long term of monthly payments the thirty-year term is more expensive. The value in the thirty-year fixed rate mortgage is in the monthly affordability and the certainty of the cost, which makes them popular with borrowers. It is the most popular option for FHA insured home loans.
The View From The Other End
Lenders and institutions that invest in mortgages have a different view of fixed rates. The banks charge a little bit extra for the privilege of locking in your rate. From their perspective it is far more preferable to be able to adjust interest rates when interest rates climb higher. That is why fixed rate mortgages will carry slightly higher interest than the adjustable rate alternatives.
The turbulent recent history of the housing market shows clearly that the future is anything but certain. If you assume that tomorrow will be like yesterday and make your choices accordingly recent history has shown that you can end up in trouble. That has been the attitude of prudent borrowers for many years and very often the deciding factor in how they select their home loans.