When an adjustable-rate mortgage seems too risky or complicated for you, a fixed-rate mortgage is worth considering. As the name suggests, this type of home loan has an interest and monthly payment that will remain the same throughout the life of the mortgage. The security and stability of monthly payments also make it easier to understand than ARMs.
What are the upsides?
The main appeal of a fixed-rate home loan is the stability of payments over time. This will enable you to budget and manage your income well, knowing that your home loan payments will be the same every month. You can also choose to make extra payments to increase your home equity and pay off the principal faster. Most of these loans don’t have prepayment penalties, but be sure to ask your lender.
Are there any risks?
A fixed-rate mortgage is considered risk-free, as your payments remain constant despite the changes in market rates. This is not possible with an ARM, as its interest rate is dependent on the market conditions. This is why you can’t take advantage if the rates fall significantly. You may have to refinance to benefit from such rates, but note that this can cost you money.
What are the typical loan terms?
The common loan terms for a fixed-rate home loan are 15 and 30 years. A 15-year loan is an appealing option because it has lower rates. The only downside is, it has higher monthly payments, as you are paying the loan faster. A 30-year loan, however, is more affordable and has lower monthly payments. The payment can spread out for 30 years, but it has higher interest rates.
Apart from 15- and 30-year loan terms, you can ask your lender about other terms which may include:
- 5 years
- 10 years
- 20 years
- 40 years
If you’re considering a fixed-rate mortgage, be sure to review its pros and cons. It’s also advisable to talk to a reliable lender to find out the types of loans can suit your situation.