There are several big questions to be asking yourself during the process of applying for a new home mortgage, and one of the most important is the basic loan interest format you’ll be taking. Mortgage rates are some of the most important factors in determining whether you made a good investment and whether you choose a fixed-rate mortgage or adjustable-rate can go a long way to determining your final tally here.
At American Loans & Mortgages, we offer a wide selection of both fixed and ARM home loans. Many people find fixed-rate is the way to go – why is this, and how might this format benefit you? Let’s take a look at the benefits and drawbacks of these loans.
What are Fixed-Rate Loans?
A fixed-rate loan is any mortgage where your interest rates – and therefore your monthly payments – are the exact same for the entirety of the loan. No matter what market factors take place after you’ve signed on the dotted line, you’ll pay the same interest rate each month.
This is in contrast to an adjustable-rate loan (ARM), where market factors can influence your monthly interest payments. The only way to change your rate in a fixed-rate situation is to refinance the mortgage, which makes sense for some people but can also be a hassle and a large expense in some cases.
Benefits of Fixed-Rate Loans
- Rates never change: Even if inflation and other factors cause the market to raise a huge amount, you’re sitting pretty. You pay only your agreed-upon figure.
- Simple: Especially for first-time homebuyers, fixed-rate mortgages are easier to understand and contain less difficult terminology.
- Budgeting: Knowing exactly how much you’ll pay each month on a large expense like a mortgage is vital for financial planning for many people. This certainly allows them to budget the rest of their funds accordingly.
Drawbacks of Fixed-Rate Loans
- Rates never change: This can be a drawback in some situations, too – if rates drop in a big way after you’ve already signed, you could be watching others get much better rates while you’re stuck with a higher one. Still, for many people this is worth the financial certainty that comes along with it.
- Costly: Fixed-rate loans start at higher interest rates due to the fact that they can’t be adjusted, and they also typically don’t offer early payment options which can allow you to get out of the loan with less interest paid if you’re able to pay it off quickly enough.
Want to learn more? The expert brokers at American Loans & Mortgages are standing by.