Home loan borrowers can choose between an adjustable-rate mortgage (ARM) and a fixed-rate mortgage (FRM). The critical difference between the two mortgages depends on whether the interest rates change or remain constant during the loan term. Irrespective of your choice, do a cost-benefit analysis. This post discusses the pros and cons of applying for a fixed-rate mortgage.
The Pros of Fixed-Rate Mortgages
A fixed-rate mortgage provides more predictability compared to an adjustable-rate loan. Essentially, the interest rates for an ARM loan do not change. Therefore, you always know how much you need to pay for the principal amount and the loan interest every month. Subsequently, it is possible to budget for the loan payments without expecting surprises. Ultimately, enhanced predictability and easy budgeting reduce the risk of foreclosure.
The terms of a fixed-rate mortgage offer more financial security to the borrower. A fixed-rate mortgage provides the borrower with a locked-in interest rate. Thus, the lender agrees not to adjust the interest loans for a specified time. If the average interest rate rises above the locked-in rate, borrowers have a guarantee that the increment will not affect them. Therefore, you can lock your interest rates through an FRM loan if you suspect that the interest rates will increase in future. This way, you can beat inflation and save money on loan payments.
It is easy to compare fixed-rate mortgage products across the different financial lenders. Typically, every borrower hopes to get the best home loan deal. With an adjustable-rate mortgage, it is hard to compare the interest rates. For instance, you can get a mortgage with the lowest interest rate in the market only for the lender to adjust the rate in future. In contrast, you are sure the lender will never alter the interest rate with fixed-rate loans. Thus, it becomes easier to compare the interest rates across the lenders and go for the best deal. Consequently, most mortgage lenders compete in providing the best FRM interest rate, which benefits the borrowers.
The Cons of Fixed-Rate Mortgages
A fixed-rate mortgage has several drawbacks that require careful consideration. Essentially, the interest rate on the mortgage can drop. Nevertheless, there is always the option of mortgage refinancing if the interest rates remain low in the long term. Then, fixed-rate mortgages have a relatively higher arrangement fee. However, it is worth comparing the costs to the amount you can save through loan stability.
Think through the advantages and disadvantages of a fixed-rate mortgage to make an informed decision. Besides, compare the different mortgage products across financial lenders for better terms.Share
19 January 2022
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