A Fixed Rate Mortgage is the most common form of mortgage in United States. In a Fixed Rate Mortgage or FRM, the interest rate on the mortgage remains the same during the tenure of the loan. They are most suited for first-time home buyers and for buyers who plan to occupy their homes for 10 years or more.
Advantages of Fixed Rate Mortgages
There are many advantages for choosing a Fixed Rate Mortgage over an Adjustable Rate Mortgage(Mortgages where the interest rate changes in accordance with a chosen index).
- Simple to Understand- An FRM is a good choice for less financially savvy borrowers because the only three components in an Fixed Rate Mortgage are the interest rate, amount of loan and the term of the loan. It is easy to calculate the monthly mortgage payments with these three factors and so the borrower knows in advance how much he/she will need to pay every month.
- Mortgage Payments Remain the Same- Since the interest rate is fixed for the entire term of the loan, these types of loans are the best protection about inflation and consequently the interest rates going up in future.
- Predictability and Long Term Planning- Since the interest rate and the monthly mortgage payments are stable, borrowers can plan for long term and are protected against interest rate fluctuations.
Disadvantages of FRMs
Although Fixed Rate Mortgages are very popular among first-time home buyers due to their stability, that stability comes with a price. In a Fixed Rate Mortgage, it is the lender who has to take the risk that interest rates may go up in future and so the lender will compensate for that risk by charging an extra interest. Interest rates for FRMs tend to be higher than Adjustable Rate Mortgages. This may also mean that the borrower may not qualify for as large a loan as he would, if he had taken an Adjustable Rate Mortgage or ARM.
FRMs are not the ideal choice when interest rates tend to be high or when there is a chance that they are likely to go down in the future. With an ARM, the rates are automatically adjusted and the borrower need not do anything while a borrower with a Fixed Rate Mortgage will need to refinance (and pay the associated closing costs and other charges) in order to take advantage of the future low interest rates.
A Fixed Rate Mortgage may be the best option while choosing a mortgage these days because interest rates are hovering at or near historically low rates. Even if the borrower does not plan to occupy his house for a long term, a Fixed Rate Mortgage may be a better deal now than an ARM.
 |
