If there’s one type of mortgage that is the most popular, it’s the fixed-rate mortgage. Perhaps it’s because of its predictability or because it’s the loan most people know about. Either way, you need to decide if it’s the right choice for you.
Learn the pros and cons of this type of mortgage to help you make your decision.
The Pros of the Fixed-Rate Mortgage
- Predictability – This goes without saying. Your interest rate never changes. You know from day one how much you will owe in principal and interest. The only amount that may change is your escrow payment. Real estate taxes and homeowner’s insurance costs may change, which could alter your mortgage payment slightly.
- Simple comparison shopping – If you shop around with different lenders (which we recommend), it’s easy to compare apples-to-apples. You look at the two interest rates for the same terms and see which one is higher. You don’t have any calculations to perform or other factors to consider.
- No worrying – You don’t have to watch the market during the months leading up to your adjustment rate to predict what your interest rate will do. No matter what happens in the market, your fixed-rate stays the same.
- A variety of terms – Fixed-rate mortgages come in a variety of terms compared to other mortgage options, such as the ARM. You may be able to choose between the 10, 15, 20, 25, and 30 year term. This allows you to play with the payments a little to determine which one suits your budget the best.
The Cons of the Fixed-Rate Mortgage
- Higher starting rate – The adjustable rate mortgage often has an introductory rate that is lower than the fixed-rate loan. In exchange for the predictability, you may pay more interest on your loan for a few years. But, you don’t have the worry of an increasing rate down the road.
- Pressure when locking the rate – Locking in your interest rate for a purchase or refinance is stressful. You have to choose just the right time, but that can be impossible. You cannot predict if rates will go up or down within the next hour let alone the next few weeks. This could leave you with buyer’s remorse if you lock in a rate and then rates fall.
- Must refinance to lower rate – If rates fall and your friends with ARMs start to enjoy lower rates, you’ll still be paying your higher fixed rate. The only way out of it is to refinance, which costs money and isn’t always in your best interest, depending on the situation.
Choosing the Right Program
The best way to determine if the fixed-rate mortgage is for you is to compare all of your options. Ask several lenders which loan programs you qualify to receive. Then you can figure out which one works best for you. Don’t look at just the interest rate, though. That is deceiving. Instead, look at the big picture.
Lay out the quotes from each lender and compare closing costs, interest rates, and closing fees. An easy way to do it is to look at the APR. This gives you the breakdown of the cost of the loan over its entirety including all costs. This way you’ll have a better idea of which one suits you the most.
Of course, only you know what you can afford and what you are comfortable with taking. For example, if you have a stable job with a known income, taking a fluctuating ARM might not be the end of the world. If, however, you have a less stable job or you work on commission, you might want the predictability that a fixed-rate mortgage offers.
Consider all of the pros and cons and all of your options before making your decision.