Fixed Rate Mortgage: Definition, Advantages and Disadvantages
Fixed rate mortgages are very popular in many countries, but not so much in others. As the name suggest, these financial products fixes the mortgage interest rate for a long time to come at a rate that is agreed at the time of mortgage application. Fixing could be for 7 years, 15 years or for the life of the mortgage.
These products are extremely popular at low interest rate periods. Mortgage applicants would love to keep the rates they are getting as long as they can. Many homeowners either well aware of consequences of interest rate increases by experience or naturally cautions. They feel that they could sleep better at night knowing that whatever happens in the economy their monthly payments will remain the same. Fixed rate products may suite better to settled homeowners who will not be moving soon, because as a cost of fixing, banks would normally require early payment penalties. They are very easy to budget for. After getting a fixed rate mortgage homeowners can spend remainder of their income more comfortably. They do not need to take in to account of any interest increases. Should the interest rates go down further considerably, homeowner could always get a refinance. Savings a refinance mortgage loan offers could be much more than the early redemption penalties they have to pay. Normally as the time goes the amount of redemption penalty is reduced. For example, it could start with 6 months interest for the first 3 years and go down to 3 months for the remainder of the loan.
Similarly, these products are not popular in the high interest rate environment, especially if there is an expectancy that the interest rates will go down. However, some homeowners may be worried that the cost of borrowing will go up even further and still prefer fixing their monthly payments. These loans are not ideal for families who are not likely to stay in their home more than two years, due to high redemption penalties. Nevertheless, some lenders would allow the fixed rate mortgage to be carried over to new property. This may require the homeowner to sell his home and buy another one in the same time.
Normally the fixed rate mortgages are more expensive to start with. Some mortgage applicants may not see their long term saving potential and may not necessarily be concerned with interest rate increases. They may decide to apply for an adjustable mortgage instead. The problem here that many new mortgage applicants is drawn to lower interest rates like a bee to honey. Their decisions may not be based on sound considerations, but based on cheaper is the better mantra.
Related posts: