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Overview of a Fixed Rate Mortgage As the name would suggest, the fixed rate mortgage is a loan that has constant payments. By constant I dont mean that they will be due every month (although they will), rather I refer to the fact that they do not change. If you get a fixed rate mortgage and the payments are $900 per month, they will remain at $900 for the duration of your loan. Nothing changes, it is set in stone, and you can set your clock by it, $900 a month for 30 years. Benefits of a Fixed Rate Mortgage. There are a number of benefits to having a fixed rate mortgage. I would like to discuss two of them, the planning power that it gives, and the financial liberty that you can take from it. Lets start with the planning power. Planning Power To take on the responsibility of a $150,000, $200,000, or even $1million dollar debt is, as a mentioned before, very scary. But, to know that all you will ever be required to pay is $900 a month (or whatever your payments end up being. I dont in any way want to insinuate that all mortgage payments are going to be $900 if you get a fixed rate.) is a very comforting piece of knowledge. You can plan your budget around that amount and make sure that you can always afford it. It really helps things out to have that amount set in stone. The next thing that most people get out of a fixed rate mortgage is financial liberty. Financial Liberty What I mean by that would be best communicated in the description of a hypothetical scenario. Picture a young couple, just out of college, just married, and brand new at the jobs in their respective careers. They decide to take out a loan and buy a house. They, because of the salary restrictions that they are working with, can only comfortably afford $500 a month. They know that this wont get them the house that really want so they decide to stretch a lot financially and get a house that will run them $800 a month. After two years they both get promotions and their bills get easier to pay. After another two years they both move into management and get more promotions. Suddenly they find themselves in a position where they can actually comfortable afford to make $900 a month payments, and later on they can make $1000 a month payments, but they dont have to. All they are required to do is $800. Every amount of money that they pay over $800 in a month goes towards paying off the principle and this gets their house paid off much faster. When the house is paid off, there is $800 a month that is no longer being tied up in living expenses. You see, in a fixed rate, 30-year mortgage, it will take 22 years to pay half of the principle because so much of that money is going towards the interest. If you consistently pay more each month than the minimum payment you can pay off a 30-year mortgage in 20 years easily. Final Synopsis For the young, first time homebuyer with a solid income, a fixed rate mortgage is a pretty good option. It allows, as was earlier stated, predictability and the possibility for earlier financial liberation. For the older first time homebuyer this is the best option. The ability to pay off a mortgage in less than 30 years is something that becomes very important as retirement approaches. For the buyers that are on a much tighter, less predictable budget, this may not be the best option. In that case there are other mortgages that would be better suited for their needs. But, as with all mortgage and real estate decision, sit down with a professional who can assess your individual needs and come up with a plan that is right for you. |
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