Fixed Rate Mortgage

When purchasing a mortgage, you will usually find mortgages lumped into two main piles:  fixed rate mortgages and adjustable rate mortgages (ARMs).

Fixed rate mortgages have been available for decades and usually span a 30 year time period.  A fixed rate mortgage is exactly what it sounds like—a mortgage with an interest rate which is fixed and doesn’t alter for the entire time span of the loan, regardless of whatever changes are occurring in the housing market.

Adjustable rate mortgages by contrast change in relation to fluctuations in housing indexes.

The majority of fixed-rate mortgages span 30 years.  During this time the initial payments go mostly toward the interest on the loan, while the rest go toward the principal later on.

If you want to pay less interest you can get a mortgage with a shorter time span; the 15 year fixed mortgage is probably the most common type after the 30 year fixed mortgage.  Naturally your monthly payments will be much higher on a 15 year home loan, but at least you won’t owe nearly as much interest.

Which type would be better for you would of course depend on your short term financial situation and your long term savings goals.

One option you can get on a fixed-rate mortgage is interest-only payments for the first five to ten years of your loan.  This may reduce your initial payments somewhat which can be beneficial.

The drawback is of course that you won’t own any equity in your home for those first five or ten years even though you’ve been paying the whole time to live there.

What is better, a fixed rate mortgage or an adjustable rate mortgage?

Back in the early 90s when the housing market was doing better, a lot of people bought into the hype that adjustable rate mortgages were superior because they offered lower initial rates.

While it is true that those people may have saved some money in the first few years of their mortgages, after the housing bubble burst, their interest rates rose through the roof (pun intended), landing many homeowners with unaffordable payments and even sending some of them to the streets. 

So are fixed rate mortgages better?  Fixed rate mortgages allow you to “lock in” a particular interest rate, which can be a more secure option in the sense that you can predict your future to some extent, even if you can’t predict the future of the housing market as a whole.

This does mean that if things improve and everyone else around you starts paying lower interest rates, yours will remain high.  But it also means if things get even worse and everyone else’s rates climb, yours will remain stable. 

Another question worth taking into consideration is how long you plan to occupy the home you’re interested in buying.

Only planning to stay a few years?  If you can procure a lower interest rate with an ARM, you may as well since there is no reason to pay the higher interest you might be offered with a fixed rate 30 year mortgage if you are planning to leave the house in three years.

If you do plan to stick around for 30 years  though, a fixed rate mortgage may well be more suitable and secure.  The choice is up to you and depends on your willingness to gamble your future interest rates.