Fixed-Rate vs. Adjustable Rate
Fixed-Rate Mortgage
A Fixed-Rate Mortgage applies the same interest rate toward monthly loan payments for the life of the loan. Fixed-rate mortgages are more straightforward and easier to understand than Adjustable Rate Mortgages (ARMs), are more secure for the buyer, and are popular with first-time homebuyers. Since the risk to the lender is higher, fixed-rate mortgages generally have higher interest rates than ARMs.
For example, a lender can offer a 30-year fixed loan to a homebuyer at a 7.0% interest rate. The loan is locked in to the 7.0% interest rate, even if the market interest rate rises to 9.0%. Conversely, if the market interest rate decreases to 5.5%, the borrower will continue to pay the 7% interest rate.
Fixed-Rate benefits include:
- No change in monthly principal and interest payments regardless of fluctuations in interest rates
- More stability may give you "peace-of-mind"
Fixed-Rate considerations include:
- Higher initial monthly payments compared to those of adjustable rate mortgages
- Less flexibility
|