Once you’ve made the decision to take those formidable first steps towards homeownership, you’ll soon find that there are a number of important decisions that you’ll need to make next. Perhaps the most important of those involves choosing exactly which type of mortgage option is the right one to fit your needs. As with so many different factors that go into owning your own home, the question of whether or not you should go for a fixed rate mortgage is one that requires you to keep a few key things in mind.
What is a Fixed Rate Mortgage?
As its name suggests, a fixed rate mortgage is a fully amortizing mortgage loan that locks you into a particular interest rate over its lifetime. Fully amortizing means that interest and the principal are combined into one total, allowing you to make one payment per month and fully pay off your loan after the specified term is passed – usually 30 years.
The Major Advantages of a Fixed Rate Mortgage
The single biggest advantage of a fixed rate mortgage is that you can essentially guarantee that your interest rate will not go up, locking you into one payment over the lifetime of the loan. If you’re paying $500 per month with a 4% interest rate for a 30 year fixed rate mortgage in 2016, you’ll be making that same $500 per month payment when you finally pay off the balance in 2046. This unparalleled level of payment stability alone, coupled with decrease risk, make fixed rate mortgages more than worth it for many people.
The interest rate that you’re granted for a fixed rate mortgage will vary depending on the market conditions. If the market favors buyers, you’re likely going to get a terrific interest rate and could save hundreds of thousands of dollars over the course of your lifetime as a result. If the market is currently in poor condition, however, you might be looking at a different story and it might be wise to hold off on that fixed rate mortgage as a result.
Fixed Rate Mortgage Considerations
One of the first things to understand is that just because the market is strong does NOT mean that you’ll get the same great interest rate from all financial institutions. It’s always a good idea to shop around and make sure that you’re getting the best deal, particularly because you’re locking yourself into such strict conditions.
Another thing to consider is a situation where the market improves from the time you got approved for your mortgage. If ten years pass and buyers suddenly have a lower interest rate available to them, you don’t automatically get a reduction – after all, you signed an agreement for a fixed interest rate. You could always refinance, but in certain conditions this may be easier said than done.
In the end, a fixed rate mortgage is NOT the right option for everyone – but it is a GREAT option for many. If you have no intention of leaving your home anytime soon, if you want the peace of mind that comes with the security of a fixed, regular monthly payment and you believe that interest rates may rise across the board sooner rather than later, a fixed rate mortgage is a great way to help make your dreams of owning your own home easier than ever before.