There are several types of mortgages available, but fixed-rate mortgages are the most popular type of home loans in the United States. If a fixed-rate home loan sounds like gibberish to you, don't worry - we will explain it easily. Here we'll illustrate what a fixed-rate loan is in simple words, and point out its advantages and disadvantages to help you determine if it's the right loan for you.
What Is A Fixed-Rate Mortgage (FRM)?
A fixed-rate mortgage is a home loan with stable monthly payment. This means that your total monthly payment of interest rate and principal (the money you borrowed) will remain the same throughout the entire term of the loan.
This is that main factor that differentiates fixed-rate mortgages from other types of loans where the interest rate may adjust or change periodically during the term of the loan.
What Are The Main Advantages Of An FRM Loan?
A fixed-rate mortgage loan lets you accurately predict the amount you will have to pay each month for your home loan - thus enabling you to determine your budget with accuracy. As a fixed monthly payment, it also guarantees payment stability and protects you against rate rises as opposed to adjustable rate mortgages (ARM) that rise and fall with interest rates.
If current rates are low, fixed-rate mortgages offer future homeowners a very affordable option. It is also the type of mortgage to consider if you think that interest rates will rise in the coming years and you want to keep the current rate.
FRM loans are good for first-time homeowners because they are much easier to understand than ARMs.
What Are The Disadvantages Of An FRM Loan?
Even though you won't have to pay more when interest rates rise, a fixed-rate loan also means that you won't pay less when interest rates decline. This means that potentially you could miss out on saving money on your mortgage if the interest rates go lower than the fixed-rate you are paying.
It's also important to keep in mind that fixed-rates are usually more expensive than adjustable rates because there is no rate break or early-on payment. Another essential factor to consider is that if you have a fixed-rate and you want to benefit from falling rates, you would have to refinance. Which means that you would have to pay for closing costs and spend a good amount of time doing paperwork.
Fixed-rate mortgages also lack the individual customization that lenders offer on ARMs. And most FRM loans tend to be almost identical from lender to lender, thus making it harder to find fixed-rate loans that are customized for your unique situation.
Factors To Consider Before Choosing An FRM Loan:
There are several factors to consider before choosing the type of home loan that is right for you. One of the first and foremost questions to ask yourself is: how long will I stay in the home I intend to purchase? If you plan on staying in the home for a very long period of time, then it is wise to consider a fixed-rate mortgage. However, if you're only planning on staying in your new home for a few years, then it makes more sense to think about getting an ARM since you won't really be exposed to huge adjustments if you plan to move out before the adjustable rate starts.
You also should check the current interest rate environment to see if the rates are high or low. If mortgage rates happen to be low (like right now), then a fixed-rate mortgage is a wise choice. However, when rates are relatively high, ARMs are a smarter decision because you still have the chance of getting lower payments without refinancing when the rates drop.
The next step is to calculate if you could still afford your monthly payment if interest rates suffered a steep rise. If you have doubts as to whether you would have the means to continue paying your home loan under those circumstances then a fixed-rate mortgage is a safer option.
Types Of Fixed-Rate Mortgages And Their Pros And Cons:
You can choose to pay your FRM loan over different periods of time, the most common are 15-year FRM loans and 30-year FRM loans, but there are also 10-year FRM loans, 20-year FRM loans, and even 40-year FRM loans and 50-year FRM loans.
What is the main difference between these home loans and which one is more suitable for you? That depends on your personal financial situation, but it's important to realize that the longer you pay for your home loan, the more interest you will end up paying over time. On the other hand, the longer you pay, the less you pay per month since the payments are distributed over a longer period of time.
A 30-year FRM home loan gives homeowners the chance of borrowing money on a long-term basis and paying it back in stable monthly payments during the entire loan term. Since you pay over a longer period of time, the monthly payments are lower. However, this also affects your overall insurance bill - which is much higher than on a 15-year loan.
Let's look at some hypothetical numbers to get a better idea of what this really means. For example, if you borrowed $300,000 towards your home loan and you are paying it back at a fixed 5% mortgage rate over a period of 30 years, you will pay a total of $264,017.35 in interest - an astronomical sum! Whereas if you pay the same loan over 15 years, you would pay a total interest of $121,028.56 - which is less than half! The flip side is that with a 30-year fixed rate, you would pay a monthly sum of $1,922.96, whereas with 15-year fixed rate, you would pay $2,684.88 per month.
If you can afford a 15-year FRM or even a 10-year FRM, you should strongly consider it over a longer 20-year FRM or a 30-year FRM because in the long run, you will save a huge amount of money on interest.
A fixed-rate mortgage loan is a good solution for homeowners who are planning on staying in the property they purchase for a long period of time. Since the interest rate is fixed it doesn't increase your monthly payments even when interest rates rise and fall. It also allows you to plan your budget accurately with complete stability and no surprises. If interest rates are low, it is a good idea to consider opting for a fixed-rate mortgage loan.
On the other hand, if rates drop you will not be able to pay less unless you decide to refinance - which will cost money and take time. That means that with a fixed-rate mortgage you could also end up paying more than those who opted for an adjustable-rate mortgage. However, since FRM loans are easier to understand and calculate, they are recommended for first-time homeowners who are still getting accustomed to mortgages.