Fixed-Rate Mortgage: Pros and Cons

When you plan on buying a home, one of the first steps is knowing the type of mortgage you want. Each mortgage has its set of advantages and drawbacks. This is where you decide according to your liking.

Among the many mortgage options you have, a fixed-rate mortgage is one of them. This loan is where you lock your payback amount and interest rate throughout the entire repayment period.

Having stability in your monthly payments sounds good, doesn’t it? You may even want to pick up your phone and start contacting potential lenders. But hold on. There are a few drawbacks you would also like to know.

There are various fixed-rate mortgage pros and cons to make a better decision. That’s what we will discuss here.

So, let’s begin

Key Takeaways

Advantages of Fixed-Rate Mortgage

In our series of fixed-rate mortgage pros and cons, let’s start by talking about the benefits you get with a fixed-rate mortgage.

Better Budgeting

Surprises are only good when you get them on your birthday. When it comes to home expenses, you would not want your cost to bear a surprise increase.

With a fixed-rate mortgage, your mortgage expenses can remain within your budget. Throughout the loan repayment period, your mortgage payments will remain the same.

This brings better clarity about the budget you need to allocate for your monthly mortgage and helps you smoothly pay off your mortgage.

Take Advantages of the Lower Interest Rates

As we’re talking about fixed-rate mortgage pros and cons, here’s the second one.

When you go for a fixed-rate mortgage, you can wait for the moment when interest rates are low. This will allow you to secure a comparatively lesser interest rate.

You can even negotiate a longer loan period with the lender. The more time you have to make your mortgage payments, the more money you can save and utilize on other expenses.

There are lenders across the United States offering a mortgage loan due after 15 or even 20 years.

Reduced Effect of Inflation

When there’s instability in the industry, like market volatility, the prices fluctuate, and the mortgage payment interest rates go up. That is where having a fixed-rate mortgage works to your advantage.

As you have a fixed mortgage rate for your entire loan payment period, your monthly mortgage expense will remain the same.

So, the next time inflation hits, and the real estate prices fluctuate, you won’t have to feel insecure about your mortgage prices going up. At the same time, your property might appreciate and make it easier to gain profit after selling.

This can also help you from potential foreclosure. If the interest rate is consistently fluctuating, it may impact your mortgage affordability and default on your mortgage loan. Luckily, won’t have to face such uncertainty with the fixed-rate mortgage.

Easier to Compare Your Options

It is one thing to know about fixed-rate mortgage pros and cons. But is the fixed-rate mortgage loan the same as all lenders? It’s not. But since the mortgage payments are fixed, it can make comparing the loan each lender offers easier.

This can make your choice easier about which lender to go for.

When choosing a mortgage loan lender, there are various other things you would want to see when opting for a fixed-rate mortgage. Before going for a mortgage, you may also want to consult with expert real estate agents and industry experts

Disadvantages of a Fixed-Rate Mortgage

As there are fixed-rate mortgage pros and cons, we’ve already talked about the positives of a fixed-rate mortgage. Now, let’s discuss some of its downsides.

No Interest Rate Reduction

Earlier, we talked about how you can take advantage of a lower interest rate by having a fixed monthly mortgage. But the question is, how do you know whether the current interest rate won’t go lower? The answer is you don’t.

You may find yourself in a situation where you lock in a certain interest rate. After some time, the interest rate in the real estate industry drops.

Can you benefit from this drop in interest? No, you can’t since your interest rate and mortgage expenses will be the same. So in this situation, you will be missing out on potential monthly savings and an increase in monthly expenses.

Higher Upfront Cost

In the long run, you can save a lot of money with a fixed-rate mortgage. But as we discuss the fixed-rate mortgage pros and cons, there is a potential downside to this situation. When buying a home, you may have to pay a higher upfront cost.

Some of these costs may include:

• Closing costs

• Down payment

• Prepaid property tax

• Homeowner insurance

That means if you are thinking of going for the fixed-rate mortgage to buy your new home, you can start cutting down on your expenses to save more money.

Cannot Pay Your Mortgage Faster

If you get an increased income and want to pay off your fixed-rate mortgage loan faster, your lender may not allow you to do so. As the monthly mortgages are fixed, that might also mean you might not be able to overpay.

The lender may have a certain cap on the amount you can pay. This restriction can bind you to complete your repayment on time and not earlier.

High Switching Cost

With a fixed-rate mortgage, you can find that there is less flexibility. Once the lender approves your fixed-rate mortgage loan, you can’t pull out of the agreement without facing a significant early repayment charge.

This expense depends upon the outstanding home equity which you are yet to own. One thing is for sure. Paying the early repayment cost may eat up your savings.

So, if you are unsure how long you will stay in your house, we suggest a shorter mortgage term. Yes, the mortgage payments might increase. But you will be saved from facing the potential early repayment charges.

Wrapping it up

These were some of the many fixed-rate mortgage pros and cons a borrower would want to know about. You would have realized that apart from the stable and predictable expenses, there are downsides that you need to keep in mind.

Now that you know about a fixed-rate mortgage, the next thing you would want to do (apart from finding a lender) is find a real estate company to meet your budget and preferences. That is where HAR helps you out. We are a Texas-based real estate agency that can help you move into your dream home.

FAQs

1. What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a type of home loan where the interest rate and monthly payments remain constant throughout the entire repayment period. This stability makes budgeting easier for homeowners.

2. What Are the Advantages of a Fixed-Rate Mortgage?

Advantages of a fixed-rate mortgage include stable and predictable monthly payments, the ability to take advantage of lower interest rates when they are available, reduced impact of inflation and market volatility on monthly expenses, and the ease of comparing mortgage options from different lenders.

3. How Can a Fixed-Rate Mortgage Help with Budgeting?

With a fixed-rate mortgage, monthly mortgage payments remain consistent, allowing homeowners to budget more effectively and plan for their expenses without surprises.

4. Can You Secure a Lower Interest Rate with a Fixed-Rate Mortgage?

Fixed-rate mortgages offer the flexibility to lock in a lower interest rate when market conditions are favorable. You can also negotiate longer loan terms to save money over time.

5. What Are the Disadvantages of a Fixed-Rate Mortgage?

Disadvantages of a fixed-rate mortgage include the inability to benefit from interest rate reductions if rates drop, higher upfront costs when purchasing a home, limitations on paying off the mortgage early, and potential high switching costs if you want to exit the mortgage agreement.