Advantages and Disadvantages of Fixed Rate Home Loans

Are you considering buying a home? Then you must also be looking for the best type of mortgage loan that will work best for you and your finances. One of the most common types of mortgage that borrowers go for is the fixed rate. Why? We will discuss more about this in this article.

What is Fixed Rate Home Loans?

Fixed rate home loan is a type of mortgage loan where the interest rate remains the same in the entire life period of the loan, as opposed to other loans where the interest rate may adjust or “float”. The payment amounts and the duration of the loan are fixed which gives the borrower easier time to plan and manage his/her budget. Fixed rate mortgage also referred to as “vanilla wafer” mortgage loan.Will there be greater savings on fixed rate home loans compared to adjustable rate loans? Read on below.

Advantages of Fixed Rate Mortgage

One of the best advantages of using this type of mortgage is that borrowers know exactly the amount of monthly payment to make up to the last penny. And with this, he can easily plan his budget to ensure that he will meet the amount of his monthly dues.

Fixed-rate mortgage borrowers also have better emotional-security than those who have availed adjustable rate mortgage. Borrowers under an adjustable rate mortgage have no idea of the amount of the monthly payment dues, which can be a problem in the long run. They have no idea how much to save up and before they realize it, the interest has gone so high already that they can no longer pay for it and may lead to foreclosure, losing the home and the equity that has been built in the home. All these can cause stress to the borrowers. But fixed-rate mortgage borrowers don’t have to face this kind of stress.

Disadvantages of Fixed Rate Mortgage

Fixed rate mortgages are usually more expensive compared to adjustable rate mortgages due to interest rate risk, where long term fixed rate loans are usually at a higher interest rate compared to short term loans.

Another disadvantage of this type of loan is that it can be somewhat harder to avail than adjustable rate loan especially for people who have less than excellent credit. This is not the case all the time but more lenders are more apt to entertain good credit buyers when it comes to fixed rate field.

One more disadvantage of this loan is that if the interest rates in general drop, then the borrowers under fixed rate type may eventually pay more than others are paying who are locked in at the lower rate. The only real way to adjust this type of loan is through refinancing which can be costly to the homeowner. However, in some cases, refinancing is a good move so borrowers must still consider the option.

We’ve discussed different things about fixed-rate home loans. Will it be perfect for your situation and especially your finances? Only you can decide now.

Remember to weigh your options wisely and assess your situation before deciding what type of loan to avail.

Author: Guest

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