Learn About a Fixed Rate Mortgage
The fixed-rate mortgage is the traditional type of mortgage, and is generally understood by most people. You make your down payment when you buy your new home, and the bank loans you the rest of the price. You then make monthly payments and the interest rate remains the same throughout the life of the loan. It's like buying a car or any other major purchase on a fixed term.
The big benefit of a fixed-rate mortgage is its stability. You don't have to worry about what interest rates are doing as the economy goes up and down. Your interest rate is locked in for the life of the loan, and the part of your monthly payment that represents principal and interest will stay the same. (If your monthly payment does change, it will be the result of changes in your escrow payments to cover property taxes and insurance on the property).
This stability makes it much easier to budget your expenses. You're never left wondering if a sudden uptick in the prime lending rate will result in a jump in your monthly house payment that will throw everything else out of kilter. For some people, this stability is an essential part of being able to make such a major purchase and commit to decades of monthly payments. Having to face the possibility that their interest rate could suddenly go up feels far too much like gambling the roof over their head.
As a result of the stability afforded by a fixed-rate mortgage, it becomes easier to set aside additional money each month without worrying that it will suddenly have to go to an increase in the monthly house payment. You can use that extra money to build an emergency fund, to save for regular maintenance work on your house (and every house needs regular maintenance on its various systems, just like your car needs regular maintenance), or to buy furniture or make other major purchases.
Some people like to make extra payments on the principal of the mortgage. This practice will reduce the amount of interest you pay over the life of the loan and will shorten the life of the loan so that you will pay it off earlier. The earlier in the life of the loan that you can make extra payments, the greater the benefit you will enjoy from it, because your first several years of payments are almost entirely interest.
A fixed-rate loan is also a good idea for anyone who travels frequently. Particularly if you like to take long vacations such as cruises or you do a lot of long business trips, you don't have to worry about coming home to discover that your mortgage's interest rate has adjusted and the payment you arranged while you were gone was insufficient to cover the new amount.
However, there are some downsides to a fixed-rate mortgage. They are more difficult to qualify for, particularly if you cannot afford to put down at least 20% of the price of the home as a down payment or you have blots on your credit report. Because the lender is locked in to that interest rate and cannot change it to reflect changing economic conditions, they will want to be sure that you are a very good risk.
Also, the interest rate will never go down, even if interest rates drop dramatically. If you were to subsequently be able to qualify for a better interest rate, you would have to refinance your home, which would mean having to pay additional closing costs.
However, the fixed-rate mortgage is still generally regarded as the most desirable home loan.
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