A fixed mortgage is one whose interest rate remains the same over the full term of the mortgage loan. This contrasts with an adjustable rate mortgage, where the interest rate can fluctuate with market conditions after a specified period of time. A fixed interest rate is easier to understand, and many prefer the predictability of repayments, and the way they have more disposable income as their income increases but mortgage repayments do not.
Benefits of a Fixed Mortgage
If you are seeking stability, and the safety of knowing exactly what you will be paying every month, then this is for you. This type of mortgage enables you plan ahead with confidence, without the possibility of facing a sudden hike in your monthly repayments because interest rates suddenly increase.
When you decide on a fixed mortgage, your choice of lender or building society will make little difference to your monthly payments because all offer very similar fixed interest rates. However, where interest rates do vary between lenders, you have the advantage of knowing that when you select the lowest rate, it will not change over the period of the mortgage.
While the rate for a fixed mortgage will be higher than the initial rate for an adjustable rate mortgage, if you take your mortgage on at a period when interest rates in general are low, then you could get a good deal for the entire life of the mortgage.
Disadvantages of Fixed Interest Mortgages
One of the disadvantages of fixed interest loans in general is that you are limited in how much you can borrow. This is particularly true when interest rates are generally high: the amount of your mortgage depends on your ability to repay, and you are liable to be restricted in the size of home you can purchase, even with a 30-year loan.
Also, if interest rates fall back to lower levels, your mortgage rate will not fall with them. You are locked into a fixed interest mortgage, and might face penalty charges if you attempt to repay it early (prepayment penalty). This is a something you should establish prior to signing for the mortgage loan.
The term of the loan could make a difference, and here are the pros and cons of 15-year and 30-year mortgages with fixed interest rates
15 Year Fixed Rate Mortgages
- Because the amortization is over a shorter period, you can increase equity over a shorter period of time. This enables you to purchase upwards at a faster rate than if you were paying a 30 year mortgage, or to repay your mortgage sooner.
- The interest rate will be lower than that for a corresponding 30 year fixed rate mortgage.
- The total amount you pay the lender in interest will be lower and so more of your cash will be going to repay the capital.
- The monthly payments will be significantly greater for a 15-year fixed rate mortgage than if you repaid the loan over 30 years. That is because you are repaying more of the capital sum, which has to be paid up in half the time.
- Because your monthly repayments are higher, you might not be able to afford as large a house as you could purchase with a 30-year fixed interest mortgage.
30 Year Fixed Mortgage
- You can take a mortgage over the longer term, knowing that your repayments will remain the same over 30 years, irrespective of the financial situation.
- Interest is amortized over double the time period than a 15 year loan, so the monthly repayments will be smaller.
- You will be paying more in interest overall with a 30-year fixed rate mortgage, so can claim more on your federal income tax returns.
- The fixed interest rate will be set at a higher level than that for a 15 year mortgage.
- Equity will build up very slowly in comparison to that of a 15 year fixed rate mortgage.
- You will end up paying more in interest to the lender.
Even if they can easily afford a 15 year mortgage, many people choose to pay over 30 years, and invest what they save in monthly payments. This can give them a yield greater than the difference in the monthly payments. This will be particularly true for those that take the mortgage at a fixed rate when rates are generally low.
If it is necessary to take a mortgage at a time when rates are particularly high, many will choose the 15-year fixed mortgage or choose an adjustable rate mortgage instead. If you had arranged an adjustable rate mortgage when rates were high, you may consider trading it for a fixed-rate loan when mortgage interest rates have dropped. You will then benefit from the lower rate for the remainder of the mortgage term.
In general, then, a fixed mortgage offers the advantage of knowing exactly what your payments will be, irrespective of interest rate fluctuations. The major disadvantages are being unable to take advantage of interest rate drops, and a limitation in the mortgage amount, particularly when rates are high. If you have questions about fixed rate loans, I can help, simply contact me directly or request a rate request using the FREE rate request form above!