A conventional fixed rate mortgage is one of the best options available when you need a loan to pay off your home. Unless you are independently wealthy, you will need some type of loan to help you buy a house. While many of these mortgages are insured by the government and obtained through the Federal Housing Authority or the Department of Veterans Affairs, they often carry certain pros and cons. If you are looking to secure a fixed rate mortgage to secure a new home, it's important that you understand both their pros and cons.
Fixed Mortgage Rates
Most fixed rate mortgages are available in terms of 15 or 30 years. These are the most popular and carry interest rates that stay the same throughout the duration of the loan, which is why they are called "fixed." When you secure this type of mortgage, your payments are mostly the interest itself. The payments are the interest rate times the principal of the loan and a small percentage of the principal. When you make your monthly payments, a small portion of the principal is included, which results in the interest being lower with each payment that is made.
Pros of Fixed Rate Mortgages
The pros of a conventional fixed rate mortgage can often override the cons. They include the following:
• Lower payments: With a 15-year and especially 30-year fixed rate mortgage, your monthly payments are cheaper due to the longer duration for the loan.
• Flexibility: You have better flexibility with this type of mortgage and can pay it off faster by adding more money to your monthly payments or making additional payments. This also allows you to make smaller payments when you need to.
• Predictability: Fixed rate mortgages are more predictable as your payments remain the same no matter what the situation.
• More house for the mortgage: If you consistently make lower payments, you may qualify for a pricier home.
• Bigger tax deduction: This type of mortgage allows you to deduct the interest on it from your taxes.
• Easier to qualify: It's easier to qualify for a longer-term mortgage when you make smaller payments.
• Ability to fund other goals: When you've made your monthly payments toward the mortgage, you have extra money to go toward other goals.
Cons of Fixed Rate Mortgages
As with anything else, there are also cons to fixed rate mortgages. They include the following:
• Higher rates: Fixed rate mortgages have higher interest rates due to the longer span of the loan.
• More interest paid: Due to the duration of the loan, your interest payments are higher versus those from a shorter-term mortgage.
• Slow growth in equity: Building equity in your home takes longer with this type of mortgage.
• Danger of over-borrowing: It can be tempting to get a bigger home when you qualify for a fixed rate mortgage. However, that can lead to over-borrowing, which can work against you.
• Higher upkeep costs: If you choose a more expensive home, your upkeep costs are higher. You will typically pay more in property taxes and even things like utilities, which can financially work against you.
It's important to do your homework thoroughly to determine whether this is the type of mortgage appropriate for you. You want to reap the maximum benefits possible.
