Fixed Rate Mortgages

Fixed rate mortgages have interest rates that are fixed for a set period of time. In most fixed rate mortgages the rate is fixed for one to five years. In most mortgage agreements, the loan will change to a variable rate mortgage after the fixed rate period is over. While many borrowers appreciate the predictability of this type of mortgage, you should realize that there are both pros and cons to fixed rate mortgages.

Pros of Fixed Rate Mortgages

The biggest benefit of a fixed rate mortgage is the predictability of the mortgage. No matter what happens in the economy, you will know exactly how much your monthly payment will be, at least as long as the fixed rate lasts.

Another benefit of a fixed rate mortgage is the fact that your interest rate will remain the same, even if interest rates increase in the economy. This means you can save quite a bit of money during the fixed rate period if rates are on the way up when you get your mortgage.

Cons of Fixed Rate Mortgages

There are many downsides to fixed rate mortgages. Of course, there is always the risk of interest rates falling. When this happens, you will be paying more than you need to for your mortgage during the fixed rate period.

In addition, most lenders charge high fees for fixed rate mortgages, particularly because they stand to lose money if interest rates increase. Also, the interest rate on the fixed rate mortgage will be higher than the interest rate on a variable rate mortgage.

Finally, early redemption penalties on fixed rate mortgages are usually quite high. You could pay as much as six months’ worth of interest payments when you decide to leave a fixed rate agreement early. This can cause you to stay in an expensive mortgage even when rates are dropping.

If You Choose Fixed Rate Mortgages

Fixed rate mortgages are not necessarily bad mortgage options. If you do decide to use a fixed rate mortgage for your next home purchase, take some time to shop around to find a lender that will not charge too many fees for this type of mortgage. Also, avoid signing up for a mortgage that ties you in for too long of a term, unless you plan on staying in the property for quite a few years. If you do sign a long-term fixed rate agreement, be prepared for the fact that rates could drop, leaving you stuck in a high interest mortgage until the fixed rate agreement is complete.