There are two types of mortgages: fixed rate and adjustable rate. A fixed rate mortgage never changes throughout the life of a loan. This can offer more stability than adjustable rate mortgages, which increase and decrease based on prime rate. For adjustable mortgages, if the mortage rates go up, so do your payments. On the other hand, if they go down, your payments do as well. The issue with this is that adjustable rate mortgages are unpredictable, making it hard to make a long-term budget. Fixed rate mortgages never change depsite how volatile the rates are, making this a very appealing option for many people who want to be able to make long- and short-term budgets. And if the mortgage rates go up, you will actually be saving money, because your rates never change.
The main factors that attract people to the fixed rate mortgage is that the interest rate and monthly payment stay the same. So an unsuspecting rise in interest rate will not affect you, and you will not be required to pay a lot more for your mortgage each month. In the 1980s, interest rates rose from 7 to 14% overnight. After a few days, they stopped at 9% finally, but just this small increase was enough to ruin thousands of homeowners. Many of the owners lost their homes. A fixed rate mortgage protects you from such fluctuation, and allows you to know exactly how much money you will need each month. Fixed rate mortgages are also easy to understand and appeal to younger people and new buyers.
Some people use treasury bonds or certificate of deposits (CDs) as a fixed income part of their portfolio. Except when inflation is dragging, those financial instruments lag with it, offering returns of less than 2%. That does not keep up with inflation. If interest rates are low, you can prepay the principal on your fixed rate mortgage--the equivalent to earning the fixed rate mortgage rate on your money.
When looking into a fixed rate mortgage, take into account that your personal finances are bound to change, interest rates can vary, and the economy can improve or diminish. Speculation can help you decide if a fixed rate mortgage is the best option for you. Because of its stability, a ixed rate mortgage can give you peace of mind that the adjustable rate mortgage cannot.
For more information about fixed rate mortgages, please contact us so we can advise you on the best direction to go in based on your needs.