Before lending companies only offered one type of home loan: the fixed-rate mortgage that comes with a 30-year term. While borrowers now have a lot of other options, the 30-year fixed-rate mortgage remains the most common.
Consumers should better understand the risks associated with fixed-rate and adjustable-rate mortgages. With the former, the rates won’t change, but borrowers might have to make higher initial monthly payments. In some cases, an adjustable-rate loan can come with a considerably lower interest than a fixed-rate loan. However, it does come with the risk of a drastic increase when the market conditions plummet.
How It Works
All mortgages and their corresponding rates depend on market factors, including stocks, foreign markets, employment rate, and inflation. With a well-performing market, lending companies can afford to offer borrowers lower interest rates, making adjustable-rate mortgages potentially cheaper for home buyers. However, because of the instability of the U. S. market, most people looking to purchase a house feel more secure with the locked-in rates that come only with fixed-rate loans.
Regardless of the term a borrower chooses, the interest rate won’t change over the course of the loan. Even if the market tumbles down, the monthly payments will stay the same for the entire term. The only cost-related changes that may occur have something to do with insurance payments and property taxes.
Nowadays, more and more mortgage companies offer a more extensive loan product line, with the available terms including the following:
- 30 Years – Still the most commonly sought-after length of term, the 30-year term has the primary advantage of having the least possible monthly payments. However, in terms of overall interest, this has the highest, although borrowers can deduct the greatest in interest payments from their taxes.
- 20 Years – Not all lenders in the country offer the 20-year term. For home buyers who do find a mortgage company offering this, know that it provides the opportunity of building up bigger equity on the property. It has higher monthly payments than a 30-year term but the lower interest rate still makes it an attractive option.
- 15 Years – This offers benefits similar to that of a 20-year fixed-rate mortgage. The primary difference is that this one has even higher monthly payments. On the good side, this means lower accrued interest.
There are a number of reasons borrowers prefer the fixed-rate mortgage, the most obvious one is the fact that its monthly mortgage payments will never change, regardless of how long the chosen term is.
In the event that stocks and employment rates go down, foreign markets perform poorly, and inflation takes place, borrowers with adjustable-rate loans will have to deal with a serious change in their interest rates. In short, they will have to make higher payments towards the repayment of their debt. Fixed-rate mortgage homeowners on the other hand, can rest easy knowing that they won’t go through the same thing.
In addition, fixed-rate mortgage borrowers also don’t have to worry that much about the path the market heads to. Of course, they should still monitor how the interest rates move, since a considerable decrease may open doors of opportunity for refinancing favorable to their situation.
Stability and Guarantee
The long-term stability and locked-in rates that come with fixed-rate mortgages make them really attractive to home buyers. This is particularly true for people who have no plans of moving to a new house in the next decade or so.
Put simply, borrowers who just want to pay their mortgage off and stay in the same home long-term will find this type of home loan their better option.