If you want to settle down in your dream house, one of the fastest ways to stop renting is to apply for a mortgage. When applying for a mortgage, you can opt for one with a fixed rate or an adjustable rate. Many people choose fixed-rate loans because they are predictable. Here is an overview of fixed-rate mortgages.
What Is a Fixed-Rate Mortgage?
This is a home loan with a constant interest rate throughout the loan term. When the loan period ends, you will have paid the lender's principal and interest in full.
One of the main pros of these loans is that the monthly payments are the same. However, the prices for insurance premiums and taxes can fluctuate. But, if mortgage rates increase after you secure your home loan, the rate on your mortgage remains the same.
How Is the Cost of a Fixed-Rate Mortgage Calculated?
Although a fixed-rate mortgage's interest rate is fixed, the total amount of interest you will pay will vary depending on how long your loan is for. Many lending institutions offer fixed-rate mortgages for different periods. The most common mortgage terms are 30-, 20-, and 15-year mortgages.
Many people opt for the 30-year mortgage because it has low monthly payments. However, the overall cost of the loan is high. Shorter-term mortgages come with higher payments. As a result, you will finish paying the principal in a short period. Additionally, shorter-term mortgages have low-interest rates; thus, the overall cost of these loans is less than what you would pay for long-term loans.
How to Distinguish Between a Fixed-Rate and Adjustable-Rate Mortgage (ARM)?
The main difference between fixed and adjustable mortgages is the interest rates. While there are no changes to the interest rates after you take out a fixed-rate loan, the adjustable-rate mortgage changes depending on market conditions.
Therefore, if mortgage rates rise, expect to pay an increased interest rate on your adjustable-rate mortgage. However, there is a limit on adjustable-rate changes. This cap protects a borrower from paying high-interest rates.
The main pro of an adjustable-rate mortgage over a fixed-rate mortgage is that it's cheaper at the beginning. These loans also have low initial payments, making you eligible for a larger loan.
Furthermore, a borrower can enjoy low-interest rates without having to refinance during the first few years of the loan. The biggest downside of an ARM is that monthly payments change frequently, and if you take a large loan, you will be subjected to high-interest rates in the future.
Contact a local loan service to learn more about fixed-rate mortgage loans.Share