When you go to buy a house, chances are that you will need to borrow the money to make the purchase ― few people have the money to buy a home up-front. A mortgage lender can help you come up with the capital you need to purchase a home. You will then repay the lender, with interest, based on pre-determined terms over a specified period of time.
You will most likely be able to choose from several different mortgage loan options. Most common are the adjustable-rate mortgage (a.k.a. variable mortgage) and the fixed-rate mortgage (i.e. fixed mortgage). An adjustable-rate mortgage will have an interest rate that changes at regular intervals. On the other hand, the interest rate on a fixed mortgage is constant throughout the life of your loan.
Benefits of Fixed Mortgages
If you are deciding between an adjustable-rate mortgage and a fixed mortgage, you should consider the benefits that come with a fixed interest rate. Two of the biggest advantages include:
- Predictability ― You know what your monthly payments will be since the interest rate doesn’t change with a fixed mortgage. This allows you to make long-term plans based on your housing expenses.
- Low Risk ― With a fixed mortgage, you are protected from the chance that interest rates could rise and increase your monthly payments (unlike a variable mortgage which is subject to current market rates). Additionally, if interest rates drop, you may be able to refinance your fixed mortgage to take advantage of a lower rate.
Choosing a fixed mortgage loan can provide you with security that an adjustable-rate mortgage cannot. As the years pass and your income increases over time, your fixed mortgage payments will remain the same, meaning that you could end up with more discretionary income. With an adjustable-rate mortgage, however, part of your income could be lost to higher interest rates (and higher mortgage payments). Thus, a fixed mortgage can help protect you, to some degree, from the ravages of inflation.
In the end, you might get a lower initial interest rate with a variable mortgage, but there is always the risk of rising rates in the future. Fixed mortgages are popular with first-time homebuyers, as well as those on fixed incomes or with lower incomes, because of the consistency that comes with a fixed rate. Before you make any major decisions, consider the advantages and disadvantages of a fixed mortgage, and see whether it might benefit you more than an adjustable-rate mortgage loan.