Fixed rate loans have a static interest rate for the duration of the loan’s term life. If the loan has a 30-year amortization, which is the popular option for long term buyers, the interest rate is locked in at the initial rate. It is dependable and gives a sense of security for the buyer because they are sure of the same payment each month. However, considering the interest payments are spread over the 30 years, then one will end up paying more interest over the life of the loan than would have been the case with an adjustable mortgage loan.
15 Year Fixed Rate Mortgage
This fixed rate mortgage is popular because it provides lower interest rates over the life term of the loan. Shorter loan terms and lower interest rates may help one with refinancing faster or building up more equity for the buyer even though the monthly payments are going to be more than the 30-year fixed loan. They present the possible risk to the buyer because of altered quality of life and defaulting should their income source be disrupted.
30 year Fixed Mortgage Rate
This is the flagship of conventional loan types because it is the most affordable. The interest is quite low on this type, but it also commits the buyer to the property for a lengthy period. If this option is selected as opposed to the adjustable mortgage loans, it would be more tiresome to sell should the buyer want to move. Hence, it is the most appropriate option for those buying family property, which is not going to change ownership in a hurry. It is also suitable for the lower income families’, considering it allows them to purchase more property considering their income ability because of the low-interest-rate levels.
Benefits and disadvantages of the fixed rate mortgages
Predictable Interest Rates
The finance market has suffered tumbles in the real estate sector mainly based on interest rates, so stability has become a crucial factor for most buyers who are now very wary of the ups and downs of the market. The fixed interest mortgages allow the buyers peace of mind because they can keep up with the payments regardless of the state of the economy.
Flexible Prepayment Terms
The majority of fixed rate loans do not come with prepayment penalties. That means the buyer can make extra payments to pay off the principal at an earlier time. It is also appropriate should interest rates would increase over the next few years. The reason is the interest is locked in.
Higher Interest Rates than ARM
Despite their predictability over the long term, the interest rates provided by the fixed term mortgages are higher than interest only and adjustable rate loans. This would make it certainly more expensive if the interest rates remain the same or reduce in the future.
Slower Pay Offs
Unfortunately, the buyer would have to pay off the principal at a slow rate, meaning it takes time to build equity in the home as compared to other flexible loans. The reason is during the initial years of the loan; the payments are primarily directed to settling the interest. These are not good if one plans to sell the home within 5 to 10 years.