How Fixed Rate Mortgage Works And Its Benefits

Banks normally offer two kinds of home loans – the adjustable rates and the fixed rate home mortgage. Both have their merits, but the fixed rate guarantees the same monthly payment until the end of its term. However, there are times when adjustable rates are preferable to fixed ones.

Here are some of the benefits you can get in choosing the fixed home mortgage rate, which you can get from institutions such as Primary Residential Mortgage, Inc.

What You Need to Know First

1. Principal Payments Are Slower

Principal payments are a lot slower in fixed-rate loans. This is because most of your monthly payments for the first few years are applied to the interest. If you’re planning to sell your property within the next 10 years, this could be a problem.

2. Higher Qualification Requirements

Banks and other lending institutions usually impose higher requirements for fixed rate applications. Even the closing costs are higher compared to those who availed of the ARM. A 30-year or even a 15-year loan is a considerable risk from a bank’s viewpoint. Borrowers who would like to get the best deals possible can avail of FHA or veteran loans. These types of mortgages have fewer requirements and have favorable payment terms.

Benefits

1. Predictable Monthly Payments

With fixed rates, you won’t be shocked with higher loan payments since the amount stays the same. This means you have an easier time planning your budget and expenses. Most banks also allow you to make additional payments to reduce your principal balance. The result is lower loan payments in the future, and many don’t even impose pre-payment penalties.

2. Protection Against Inflation

Adjustable mortgage rates are particularly vulnerable to inflation since it increases the loan amount you need to pay. This is the reason why many prefer fixed rates on the home mortgage due to resistance to inflation.

Current Interest Rates

A fixed mortgage rate loan can protect you from the effects of inflation. Interestingly, interest rates have been falling during the past three decades. This makes Adjustable Mortgage Rates (ARM) more attractive to borrowers. On the other hand, once inflation rears its ugly head, most would prefer the fixed rate loans.

You should know that it takes longer to pay the principal balance since you’re paying mostly the interest. After only after a few years can you see a significant reduction in your principal amount. In, addition banks also impose higher requirements for fixed rate loan borrowers.

On the other hand, fixed-rate mortgage loan offers predictable monthly payments that are unaffected by inflation. Such feature is not present to other types of loans such as ARMs and interest only loans.