The pros and cons of different types of mortgages can be difficult to understand, especially for first-time home buyers. Mortgages tend to fall into two general categories: fixed rate or adjustable rate. Each has benefits for homeowners if they are used wisely. As they are the most common type of loan, buyers are interested in learning about the pros and cons of a fixed-rate mortgage loan.
A fixed-rate mortgage is just that: The interest rate is fixed for the life of the loan; it does not go up or down. (An adjustable-rate mortgage's interest rate will fluctuate with the market -- meaning the rate on the balance can change from time to time, increasing or decreasing your monthly payment, depending on terms of the loan.)
The advantages of a fixed-rate mortgage
-- Ideal for home buyers who prefer predictability. It is easier to figure a family budget when there aren't any wild cards, especially with a significant bill such as the mortgage. Whether a homeowner chooses a 15-year or 30-year fixed rate, the monthly payment changes very little or not at all. Whatever changes do occur are usually due to insurance and property tax changes.
-- Great for those who buy when interest rates are low. With the assurance that your rate will not rise, you know what to expect.
-- A good choice for those who plan to be in their homes for a long time -- or forever. This is an especially good choice if you have a mortgage that allows you to prepay without penalty (allowing you to start paying off the mortgage ahead of time).
Of course, there are downsides, even to something as stodgy as a fixed-rate mortgage.
The disadvantages of a fixed-rate mortgage
-- These types of mortgages may be harder to obtain, especially if the borrower has had credit problems in the past. After all, 15 or 30 years is a long time to lend money, and the bank or lending institution needs to have some assurance that the borrower is trustworthy.
-- In the past when interest rates were quite high, many homeowners were reluctant to sign a 15- or 30-year mortgage at high rates. If the rates fell before the loan was paid off, they would essentially lose a great deal of money. Certainly, they could refinance for lower rates, but that would require paying closing costs and loan origination fees again, which can run into the thousands of dollars.
-- Those who couldn't wait for rates to fall often had to settle for less of a house. When rates are high, say 8 percent or higher, a great deal of the monthly payment is interest. The only way to control the monthly payment is to buy a less expensive house or make a larger down payment.
Ultimately, a fixed-rate mortgage is a good choice when interest rates are low, when you are purchasing a house you plan to call home for many years, and when you have a good credit history.
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