Benefits, Drawbacks, and Terms of Fixed-Rate Mortgages
A fixed-rate mortgage is a type of loan that comes with a fixed instead of floating interest rate. The rate of interest remains fixed over the term of the loan. The period can vary from 10 to 35 and even 50 years. Payments go toward interest charges first and then toward the principal amount. Borrowers pay more toward the principal at the end of the repayment period. Some financial institutions also impose prepayment penalties in case the borrower pays the loan earlier than agreed. In most cases, the penalty is equal to 6 months of interest.
Benefits
Fixed-rate mortgages offer several advantages, and one is that borrowers know the amount of their monthly payment. Unlike them, adjustable rate mortgages come with fluctuating rates. The monthly payment may increase or decrease if the interest rate goes up or down. Borrowers end up paying a lot of money if rates skyrocket. Taking out a fixed-rate mortgage makes it easier for borrowers to budget and plan their monthly expenses. Except for factors such as real estate taxes and insurance premiums, the monthly payments remain fixed.
The loan comes with a slightly higher interest rate, but it is fixed, which gives people emotional security. There are no repayment surprises to worry about. This is a good option for borrowers on a tight budget and those who don’t expect their income to increase in the future. Taking out a fixed-rate is also a good idea when the interest rates are low.
There are hybrid types of loans that combine the terms of adjustable and fixed-rate mortgages. Borrowers pay at a fixed rate within a pre-agreed period and then the loan reverts to floating rate. This option is beneficial for first-time buyers who are unsure if they would be able to make payments when interest rates go up. Thus they can opt for a fixed rate for a period of up to 10 years. Once this period is over, the rate adjusts with interest rate fluctuations.
Drawbacks
There are some drawbacks to fixed-rate mortgages, one being that your monthly payments won’t go down if the interest rate drops. Another disadvantage is that this type of financing usually comes with arrangement fees. Also known as administration, completion, and booking fees, borrowers are often required to pay fees for setting up the loan. Applicants may be required to pay more than one fee, depending on the loan provider. Some financial institutions also require a survey and mortgage valuation. This depends on the age and condition of the property. Borrowers also pay a fee for this. Other charges include exit fees and higher-lending charges. Financial institutions often have exit fees, which apply when a borrower switches lenders or pays off the loan. Other fees apply when a borrower buys or sells a property. These include legal fees, stamp duty, and expenses for an energy performance certificate.
Finally, another drawback of fixed-rate mortgages is that many borrowers cannot afford to buy an expensive property because the interest rate is higher.
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