Advantages of a Fixed Rate Mortgage

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Author: Wesley Pritchard

When it comes to obtaining a first mortgage, or refinancing an existing one, it is necessary to consider whether a fixed rate or variable rate mortgage would be in your best interest. While there has been a lot of support for variable rates in recent years, there are several compelling reasons why going with a fixed rate option would be the best approach. Here are some of the benefits associated with this type of mortgage, as well as a couple of examples of what type of homebuyer is likely to find a mortgage of this kind to be the ideal choice.

One of the more obvious advantages of fixed rate mortgages is the comfort of knowing exactly what you will pay from month to month. Unlike a variable mortgage, you can easily budget that payment with no worries about the amount suddenly going up due to shifts in the economy. Your payment will remain the same for as long as the mortgage is active. For people who prefer to keep their finances simple, going with a fixed rate is the only way to manage a mortgage.

It is this built-in consistency that also makes a fixed rate mortgage attractive to people who intend to retire the mortgage early. Assuming the mortgage contract does not include provisions for the lender imposing penalties for early payoff, the savvy homebuyer who wants to double up on payments in order to retire the mortgage early will know exactly how much he or she will save from the activity. This is simply not possible to accurately project with any other type of mortgage plan.

While many people assume that fixed rate mortgages are only offered at the current prime rate of interest; that is not necessarily the case. A prospective homeowner with excellent credit stands a very good chance of being able to shop around for fixed rate that is below the current average. Depending on where the buyer lives, there is a good chance that at least a few of the fixed rates will be lower than a number of the variable rates currently available.

Should the economy remain more or less stable for ten to twenty years, there is a very good chance that buyers with spotless credit will save a great deal of money over the life of the mortgage, simply by going with the most competitive fixed rate.

There are primarily two basic options with a fixed rate plan. One is known as the thirty-year fixed rate. One of the main benefits to this type of mortgage plan is that it has been around for a number of decades now. The number of lenders who offer mortgages of this kind is plentiful. This is good news for anyone who is looking for a first time mortgage on a starter home. The provisions are generally very plain, making them easy to understand, and even people who don’t consider themselves to be particularly sophisticated with money matters will have little trouble understanding how this type of fixed rate plan works.

The second traditional approach is the fifteen-year fixed rate mortgage. While it is possible for first time homebuyers to go with this option, it is more commonly used to refinance an existing mortgage. Often, using this format for refinancing will result in a lower rate of interest applied to the balance and actually lower monthly payments. This is especially true for anyone dealing with an adjustable or variable rate mortgage during a period when rates are expected to remain high. Going with this type of fixed rate plan will still make it possible to pay off the mortgage according to your original plans, but also provide some financial respite in the interim.

Not every situation is right for a fixed rate mortgage. There are times where the use of the variable or adjusted rate approaches simply makes more sense. However, going with a fixed rate approach may still worth taking the time to consider. This is especially true during periods when the economy over the next ten to twenty years is expected to perform badly, and there is a good chance that interest rates will be significantly higher for most of that time.

Before you may any decisions about what type of mortgage structure is right for your situation, take the time to talk with a qualified lender. Ask them to help you evaluate your circumstances and make recommendations based on the state of the economy today and what analysts are projecting for the next several years. By comparing their responses and the reasons behind those responses, there is a good chance you will find that going with a fixed rate is your best option.

Wesley Pritchard is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as mortgage rates.