Pros and Cons of Fixed Rate Mortgages
Mortgage rates heavily depend on the time period for which it is taken, which is known as term of the loan. Borrowers can choose from fifteen, twenty, or thirty year mortgage terms. In some cases, the term can even be extended up to fifty years. The prevailing real estate prices and the loan market also affect mortgage rates. The material used, current market value of the property, and its location further determine the mortgage rates. Fixed rate mortgage is one of the most popular types of mortgage options available.
The main advantage of a fixed-rate mortgage is that the periodic payment remains the same through out the term of the loan. This predictability of installments makes planning and budgeting easier for the borrowers. Fixed rate mortgages are also far less complicated to understand and easier to apply for and are also much simpler to understand. However, if the interest rates drop in future, borrowers will have to go for refinancing to take the advantage of dropping interest rates, which will require additional paperwork and costs. On the other hand, adjustable mortgage rates allow borrowers to go for a higher mortgage amount. The major advanatage with adjustable mortgage rates is that if the mortgage was taken at a particular rate and then the rates fall, the payments will automatically be recalculated as per the new, lower rates. The disvantage is that the converse is also true, which means if the rates go up, the mortgage rates also go up.
Fixed rate mortgages comes with a higher interest rate as it offers security to the borrowers and binds the lenders to charge the same rate irrespective of the prevailing market conditions. With adjustable mortgage rates, the rates offered at the start of the mortgage are generally lower than the existing marketing rates at the time. However, this means the first adjustment in the rates during the term of the loan can alter the monthly payments considerably.
Fixed-rate mortgages are quite standardized from lender to lender, which means borrowers cannot hope for much customization of their loans.
