Fixed Rate Mortgage Pros and Cons
Fixed Rate Mortgage Pros
Interest Rate Cannot Increase
A fixed rate mortgage lives up to its name because the interest rate cannot change or increase over the life of the mortgage. This provides borrowers with significant certainty over the life of their loan. Even if mortgage rates increase, economic factors fluctuate or your personal financial profile changes, the interest rate on your mortgage remains the same.
Monthly Payment Does Not Change
Because your interest rate cannot change, your monthly mortgage payment does not change with a fixed rate mortgage. With other mortgage programs such as an adjustable rate mortgage (ARM) or interest only mortgage, your monthly payment is subject to change and potentially increase significantly over the life of the loan. Some borrowers may not be able to afford a mortgage payment that increases suddenly, especially if their financial circumstances have changed since they obtained their mortgage. A fixed rate mortgage eliminates the risk the borrowers may be required to make a higher mortgage payment over the course of the loan, which is a key positive.
Attractive Option When Rates Are Low
A fixed rate mortgage is an ideal home financing option when interest rates are low. In this scenario borrowers are able to lock in a low interest rate which improves their ability to qualify for a mortgage and results in a lower monthly payment. For most borrowers, the lower the interest rate, the larger the mortgage you can afford. Additionally, with a fixed rate mortgage borrowers benefit from the lower mortgage rate over the life of their loan without worrying about an increase in interest rates in the future.
Flexible Mortgage Term Options
A fixed rate mortgage offers more flexible mortgage term options than other mortgage programs. Lenders usually offer fixed rate mortgages with a range of terms including 10, 15, 20, 25 and 30 years. Some lenders even offer a 40 year term although this is relatively rare. With a fixed rate mortgage, the shorter the term, the lower the interest rate and the longer the term, the higher the interest rate. A mortgage with a shorter term and lower rate reduces your total interest expense over the life of your loan although you are required to pay a higher monthly payment because you are amortizing, or paying back, the loan over a shorter period of time. By offering a range of loan lengths, a fixed rate mortgage enables borrowers to select the mortgage term that meets their financial goals.
Peace of Mind
The main benefit of a fixed rate mortgage is the peace of mind it provides borrowers. Borrowers with a fixed rate mortgage can sleep better knowing that their interest rate and mortgage payment cannot change. For borrowers with a 30 year loan, that means three decades of mortgage certainty. Borrowers with a lower appetite for risk are usually well-served by selecting a fixed rate mortgage.
Fixed Rate Mortgage Cons
Higher Interest Rate Than Other Mortgage Programs
The interest rate on a fixed rate mortgage is usually higher than the rate on an adjustable rate mortgage (ARM) or interest only mortgage although the rate on an ARM or interest only mortgage is subject to change after the first three, five, seven or ten years, depending on the type of mortgage. Paying a higher interest rate may limit the size of mortgage you qualify for and means you could potentially pay more in total interest expense over the life of the loan.
Higher Monthly Payment
A higher interest rate for a fixed rate mortgage as compared to the initial interest rate for an ARM or interest only mortgage results in a higher monthly payment. A higher monthly payment is the essentially the cost for the greater financial certainty provided by a fixed rate mortgage. Borrowers should weigh the benefits of a fixed rate mortgage against the cost of a higher monthly payment (at least for the initial three-to-ten years of the loan) when deciding what type of mortgage is right for them.
Locked Into Interest Rate If You Cannot Refinance
One of the positives of a fixed rate mortgage -- that your interest rate cannot change -- can also be a negative if interest rates decline and you cannot refinance your mortgage. With an ARM or interest only mortgage, if interest rates go down then your mortgage rate likely decreases as well. With a fixed rate mortgage, however, your mortgage rate is set and not affected by fluctuations in interest rates. If interest rates go down you must refinance your mortgage to benefit from the lower rate. Refinancing your mortgage can be costly and time consuming. Additionally, changes in your financial profile such as a job loss or decline in your credit score may prevent you from refinancing. In that case you are stuck paying the higher rate even thought mortgage rates have declined.
More FREEandCLEAR Resources
Review our comprehensive overview of how a fixed rate mortgage works including key program terms and helpful examples.
Use our Mortgage Calculator to determine the monthly payment and total interest expense over the life of a loan for a fixed rate mortgage based on interest rate and loan term. Also review how the split between principal and interest payments change over the course of the mortgage.
Review interest rates for a fixed rate mortgage in your area based on loan length and other factors. Comparing interest rates from multiple lenders is the best way to find the mortgage that is right for you.
Compare fixed rate, adjustable rate (ARM) and interest only mortgages including key features such as monthly payment, interest rate and risk level to determine the program that meets your personal profile and financial objectives.
Fixed Rate Mortgage: https://www.fdic.gov/consumers/assistance/protection/mortgages/looking/index.html#Fixed