The home-buying process is overwhelming when you go through it for the first time. The most stressful part is often getting a home loan. The simplest mortgage type is the fixed-rate loan, where you get a set rate and payment for the entire term. It has several key advantages relative to the adjustable-rate mortgage.
Locked-in Payments
When interest rates are low, it is better to lock in at a fixed rate than to risk upward movement on a variable-rate loan. Getting a low fixed rate removes the stress of worrying about whether your loan payments will balloon after five or seven years. The lower the rate at the time you buy, the more sense it makes to take the fixed-rate option.
Simpler Budgeting
Budgeting requires discipline and a first-time homeowner benefits from knowing that the mortgage payment is constant. You set the rest of your debt and expense payments by subtracting your home payment from your income.
In contrast, when you get an adjustable-rate loan, you may have to cut back on spending in some areas when your payments go up. For couples that have established habits, cutting back is a challenge.
Less Risk of Foreclosure
The worst-case scenario with a failed mortgage is foreclosure. With a fixed rate, it is easier to project your ongoing ability to make payments. Balloon payments catch homeowners by surprise. When your monthly mortgage installment shoots up by $300 to $500 or more, it is hard for a paycheck-to-paycheck household to adjust.
A low, steady rate minimizes your exposure to missed payments and foreclosure, assuming you do not run into problems with your employment.
Conclusions
Fixed-rate and adjustable-rate loans each have their values. However, the fixed-rate alternative is your best choice as a new homeowner when interest rates are low. This loan type is easy to understand, and it offers predictable payments, simple budgeting and minimized risks of foreclosure.
These factors make it the default mortgage type unless you have compelling reasons to go in another direction. Call a mortgage consultant to discuss rates available to you.
