Fixed Rate Mortgage

A fixed rate mortgage, sometimes called a conventional mortgage, is one in which the interest rate does not change for the life of the loan. The interest rate may be slightly higher than the starting rate of a variable rate mortgage, but you gain the advantage of knowing ahead of time that your payments will never go up.

The net result is often favorable with a fixed rate mortgage. That is, if the interest rate rises significantly, you would end up paying much more interest over the life of the loan if you were to have an adjustable rate mortgage.

The security of being able to budget adequately for your mortgage payment, which is often a person’s largest monthly bill, is a major benefit of a fixed rate mortgage. The only variance that may occur is the payment for homeowner’s insurance; if this amount is figured into your monthly payment. The principal and interest payments will always stay the same.

For those who need to work within a fixed, predictable budget environment, the fixed rate mortgage is the best option. Before deciding between a fixed rate and adjustable rate mortgage, look at the economic indicators and what the economists are saying about the interest rate.

Is it very low now and likely to rise significantly over the next few years? If so, the adjustable rate option may look very good temporarily, but you’ll get socked later on down the road with a big interest payment. Has factors in the economy made the interest rate unusually high? In that case, the ARM may be a more viable option.

However, even if you take a fixed rate mortgage and the interest rates later go down significantly, you may still be able to take advantage of the trend by refinancing your fixed rate mortgage and obtaining a new fixed rate mortgage at a lower interest rate.