Mortgage Lessons: Fixed Rate Mortgages
Whether it's your first or your tenth, a mortgage can be scary. With Fed rates changing, a lot of homeowners who jumped into the market amidst the "lowest interest rates in 20 years" hype are starting to see the benefits of fixed rate mortgages. Fixed rate mortgages, while not especially glamorous or exciting, are steady and safe.
With a fixed rate mortgage, your monthly payment is always the same. While it won't go down (unless you make extra payments), it won't go up either. If you poured every dollar into getting the largest home your salary could afford, a fixed rate mortgage can be a huge comfort! No matter how much interest rates fluctuate, you'll be able to create a budget that you can truly stick to and payments will never take you by surprise.
A fixed rate mortgage is the financial counterpoint of an adjustable rate mortgage, which can change over time. Often, the payments and interest rates start out low--thus the appeal of the adjustable rate mortgage (ARM)--but slowly creep higher. In essence, you give up control over the amount of your payment in exchange for a good deal. Many people sign ARMs and refinance in a few years. If you're planning on staying in the house for more than five years, this can be a good option. However, if you're not sure you'll be staying in the home for that long, it may not be worth paying the closing costs for a refinance. A fixed rate mortgage can help you lock in a good, solid rate from the start.
For a fully amortizing loan, your first payments will go mostly toward the interest, so don't be surprised when your actual principle amount doesn't change much. It can be discouraging, but it's not a big deal, especially if you're in it for the long haul. Once your payments start getting applied in full to the principle, you'll see your equity increase quickly.
In conclusion, a fixed rate mortgage is a safe route in a time of unsteady interest rates. For the budget conscious and the future homeowner who wants a hassle-free mortgage, a fixed rate might be a better option than an adjustable rate.
Here's a mortgage tip: make biweekly payments and see your loan get paid off quicker. In essence, you'll be making 13 months' worth of payments in each year, but because you're on a regular two-week schedule, you won't feel the pinch as much as you might if you simply had to cough up an extra mortgage payment at the end of the year.
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