According to NerdWallet, nine out of ten homebuyers who use a mortgage to buy their home opt for a 30-year fixed-rate mortgage. So what makes the fixed-rate mortgage so popular? Why do some people choose other forms of financing? Reviewing fixed-rate mortgage pros and cons can help you understand your options and choose the right loan product for your housing goals.
Fixed-Rate Mortgage Pros and Cons
What makes a fixed-rate mortgage a fixed-rate mortgage? The defining characteristic of this type of loan is its interest rate. As Investopedia explains, a fixed-rate mortgage is a home loan that has the same interest rate applied throughout the life of the loan, so both the monthly mortgage payment and the interest rate remain constant until the loan is repaid.
Every payment goes toward paying off both the principal and the interest, although the amount of the payment that is dedicated to each one shifts according to an amortization schedule. In the beginning, the majority of the payment is put toward interest. As the end of the loan nears, the majority of the payment goes toward the principal.
The Advantages of Fixed-Rate Mortgages
As Realtor.com reports, fixed-rate home loans offer several advantages:
- Simplicity: While no loan paperwork is likely to be considered light reading, fixed-rate loans are generally less complicated than adjustable-rate or interest-only loans. The relative simplicity of fixed-rate mortgages makes it easier to understand the ins and outs of the loan and to compare offers from various lenders.
- Predictability: With a fixed-rate loan, you always know what your mortgage payment and interest rate will be. This predictability can make financial planning easier.
- Security: Knowing what your housing expenses will be also provides peace of mind and a sense of security. Having a fixed-rate loan means that you won’t have to worry that soaring interest rates will push your mortgage payment beyond your means and put you at risk of losing your home.
- Savings: If interest rates rise, having a fixed-rate loan can provide you with substantial savings over the life of the loan.
- Flexibility: Few fixed-rate loans come with prepayment penalties, so you have greater flexibility in paying off your mortgage. You can simply make the required payment. Alternately, you can pay extra towards your principal to build equity faster, reduce the amount of interest you’ll pay over the life of the loan, and pay off your loan sooner. If you do decide to pay extra, you can do it on your own terms. Some borrowers pay a little extra every month. Others only pay extra when they have extra funds available.
The Disadvantages of Fixed-Rate Mortgages
Of course, fixed-rate mortgages also come with some drawbacks. According to The Balance, there are three primary disadvantages:
- Higher Interest Rates: Consistency has a cost. Fixed-rate loans generally have a higher initial interest rate than other types of loans. As a result, borrowers who plan to sell quickly often prefer adjustable-rate loans. They save money with the lower initial rate and sell before interest rates begin to climb.
- Slower Equity: Because of the amortization schedule (which designates that the largest portions of your early mortgage payments go toward interest instead of principal), your equity increases slowly with a fixed-rate mortgage. Making additional principal payments can offset this.
- Stability: How could stability be a disadvantage? Adjustable rate mortgages have a fixed interest rate for the first 5-15 years, after which the rate can change once every year for the remaining life of the loan. When the rate changes, your monthly payments will increase if rates go up and decrease if rates fall. Borrowers with adjustable-rate loans automatically see the benefit of falling interest rates as the rate on their loan drops to reflect the market shift. Borrowers with fixed-rate loans don’t. If they want to capitalize on falling interest rates, they have to go through the process of refinancing their loan.
How do these fixed-rate mortgage pros and cons play out in your situation? Which option will help you achieve your housing goals? At PrimeLending of Kansas City, we understand that every borrower is different. That’s why we offer personal, customized service. We’ll listen carefully to what you want and what you need. Then, we’ll put our expertise to work to help you choose the best loan product for your circumstances. Contact us today to get started on your journey to homeownership.