A mortgage is one of the most common means of getting a loan, usually for the purpose of buying a home. Since the mortgage is so commonly used, there are several types or mortgage deals. Which can further be divided into mortgages of different terms and conditions. The most basic division of mortgages can be drawn between fixed-rate and adjustable-rate mortgages. In this article we will deal with the characteristics, pros and cons of the former.
Fixed-rate mortgages, also known as traditional mortgages, are mortgage deals where the interest rate is fixed. It means that it does not fluctuate over the years and it does not follow the official rates. As a result, the amount of the monthly installment you pay for the mortgage also does not change. It remains identical as long as the mortgage agreement lasts.
When it comes to the duration of fixed-rate mortgage agreements, they can vary significantly. It take the period from 10 to as much as 50 years for the repayment. Most people think that they are obliged to sign long-term agreements when taking a mortgage. Such as 30-year or 40-year agreement, but depending on your funds and monthly incomes, it does not have to be the case.
The interest rate of a fixed-rate mortgage is determined according to several factors, such as:
Your credit rating
it is common for many types of loans that the lender checks your financial history, your income and credit rating, so the fixed-rate mortgage is no exception. Based on these criteria, the interest rate of the mortgage will be determined.
Prevailing interest rates at the moment of the agreement
With adjustable-rate mortgages, the interest rate changes as the prevailing interest rate changes. With a traditional mortgage, the interest rate is fixed from the moment of signing the agreement. It is partially based on the prevailing interest rate at that moment.
Who pays for the closing costs
If you choose to include certain costs into the interest rate, such as having the bank cover your closing costs, the amount of interest will be slightly higher.
Private mortgage insurance
You can also pay slightly higher interest rate if you decide to use lender-paid mortgage insurance, which is another way of the bank covering your costs.
Naturally, just like any other type of loan, this one also has its advantages and disadvantages, determined by various factors. One of the most obvious advantages is that the interest rate does not change over the years. It makes it easier for the borrower to plan and distribute the available funds, because the monthly installment of the mortgage never changes.
With adjustable-rate mortgages it often happens that the prevailing interest rates rise. That makes the installment rise as well, while with fixed-rate mortgages the installment remains the same despite the rise in the prevailing interest rate. When it comes to disadvantages, traditional mortgages can have high up-front costs. Also they have the comparable interest rate is usually higher than for the adjustable-rate mortgages.