A fixed rate mortgage is a loan where the interest rate remains the same for a given period of time (not always 30 years). Most people think of a fixed loan as a 30 year fixed loan. This is not always the case. A loan can be fixed for 6 months, 2 years, 3 years, 5 years, 7 years, 10 years, or other terms. After this initial term, it usually becomes adjustable over the remaining months or years of its loan. It adjusts to a new rate based on a stated formula. There may also be terms on how often it changes, what the maximum size of a change can be over a specific period of time, and the maximum lifetime rate of the loan. There can also be hybrid features attached to these loans. For example, there are loans available that: are fixed for 30 years offer the option of an interest-only payment for the first 10 years of the loan feature the protection of a 30 year fixed rate, with the option to make lower payments for the first 10 years A loan can also: have a 40 year term be fixed only for the first 30 years Generally speaking, the longer a loan is fixed for, the higher the interest rate is. In recent times the difference between short-term and long-term rates has not been that much, so many people have opted for fixing their loans for a longer term. Drawbacks Mortgage loans usually are not portable you cant take a low fixed rate mortgage from one house to your next house. When a borrower gets a 30 year fixed loan, they have the peace of mind that their loan payment will not change for 30 years. Most people dont keep their home for 30 years. When they move, they will have to shop around for interest rates prevailing at that time. Rates may be different at that time they may even be higher. So that 30 year peace of mind doesnt necessarily mean 30 straight years of the same exact interest rate. This is the reason some buyers get a slightly lower rate loan that is only fixed for 5 or 10 years. If you only plan on staying in a house 2-3 years, it may be worth getting a loan that is fixed for fewer than 30 years. Refinancing Also, people who own a house tend to refinance it. This can be for additional cash or to lower their payments because their equity has built up. If your fixed rate on your home is lower than current market rates, you can choose to get just a second loan instead. That way you can keep the interest rate on your original loan. Sometimes the new second loan is so expensive it makes sense instead to refinance your current loan. |
