Fixed Rate Mortgage – Advantages and Disadvantages

2007-03-08 10:33:40

( Financial )



Before you take on a fixed rate mortgage for your house, you must first consider if this type of loan is the best for you. In a fixed rate loan, which is also known as conventional mortgage, lenders charge you with the same interest rate for the whole duration of your loan. Since the rate is fixed, your mortgage will not be affected by changes or volatility of interest rates. Fixed rate mortgages are offered for most periods and on an assortment of terms, such as 30 year fixed mortgage rates.

Advantages

This type of mortgage is ideal for risk-averse persons. Fixed rate mortgages are for those who want to have a control of their budget and future repayments. You don’t need to worry about interest rate fluctuations because you are assured that your payments would not vary so much. If you are a first time home buyer and you have borrowed to your highest limit, then it would be wise for you to fix your loan amortization to a level that you can comfortably afford to shell out.

A fixed rate mortgage is sensible when interest rates are low or when you are expecting the rates to further rise. You can save a lot of money because your monthly amortization will stay the same during the entire term of the loan, despite interest rate hikes. Thus, it may be good to secure a 25 year fixed rate mortgage when interest rates are at the bottom level.

Disadvantages

One major disadvantage of fixed rate mortgages is that you won’t be able to benefit from interest rate decreases. It might even cost you money if the rate falls below the rate of your loan.

Another drawback to having a fixed rate loan is that you might pay early redemption fees if you decide to pay your mortgage earlier than you loan period or if you decide to switch your mortgage. Only few lenders do not impose early redemption penalties.

You might also be forced to obtain insurance for your mortgage because many creditors won’t approve your loan without it.


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