Fixed Rate Mortgage: Sure Thing for Buying a Home
Should you get the traditional fixed-rate mortgage, or one of the newer adjustable rate mortgages? That depends on how long you plan to live in the house, and how comfortable you are with risk.
Long Term ResidencyYou’ve found the house you want to buy. You plan to stay there for many years to come. Now you need a loan to pay for it. You wonder whether you should get a fixed rate mortgage or an adjustable rate one. That depends on whether you like a sure thing or gamble.
- Fixed rate mortgage: a sure thing. If you will be staying in your property for ten years or more, a fixed rate mortgage offers a pretty good deal. No matter how high interest rates go in the future, your interest rate will stay low. While rates today may not be quite as low as the rock-bottom rates of 2002-2003, they are still very close to bottom and have rarely been lower in history. It is very likely that rates will go up over time.
- Adjustable rate mortgage: a gamble. You are taking the chance that interest rates will not rise during the course of your mortgage. It may seem more attractive at first because initial monthly payments are usually lower than on a fixed rate mortgage. It is a virtual certainty that rates will not go down much, since they are so low already. Worse, interest rates and payments often rise faster than salaries do. If that happens, you may not be able to make your increased monthly ARM payments and you could lose your home. ARMs are traditionally popular with doctors, lawyers, and others who have a strong likelihood of making more money in the future. If you can't be so confident, don't risk an ARM.
Short Term ResidencyYou'll be stationed in the area for two-three years before moving on. Does a 15 or 30-year fixed-rate mortgage make sense when you will be staying there such a short time?
- Fixed rate mortgages are still a sure thing. The rate will stay the same, and even just over the next few years, rates are more likely to increase than decrease.
- Adjustable rate mortgages are still a risk, but maybe a good risk. If you will be staying in your house three years or less, it is unlikely rates will rise very high. Plus, you will be paying more toward interest, which would likely leave you in a better position to make money if you sell the home. You have to take a hard look at how much you will pay over the next three years with each type of mortgage to see which, if either, will offer greater savings. A third alternative lets you have a bit of both worlds: a "hybrid" adjustable rate mortgage with a rate cap, or even a rate freeze for the first few years. If you are certain you will be moving within a few years, this kind of hybrid mortgage is a pretty solid choice.
Fixed Rate Mortgage: The Sure ThingIn short, if you like a sure thing, get a fixed rate mortgage. With interest rates currently at an historic low, this type of financing makes more sense than ever. There are various terms for fixed rate mortgages, the most popular being a 30-year fixed rate mortgage. The interest rate and monthly payments remain the same for the life of your loan. From the outset, you know the maximum principal and interest you’ll pay for your mortgage. And there are other advantages:
- There will be no unexpected, large or otherwise, increases in your monthly payment with a fixed rate mortgage. This consistency enables you to plan your finances better.
- With inflation, your fixed rate mortgage monthly payment will become less of a burden in the future. This is because even as your income rises, your principal and interest will remain the same.
- A fixed rate mortgage can enhance your lifestyle in the future. Your fixed rate mortgage payment may be higher than on an ARM in the beginning and you may feel strapped. However, think of your payment as insurance against higher payments in the future. You will have greater income with the same mortgage payment giving you more discretionary income for lifestyle improvements.