HOW YOU CAN BENEFIT FROM A FIXED RATE MORTGAGE

Fixed rate mortgages are fixed at a certain interest rate throughout the life of the loan, which means that you will know exactly how much is going out every month on your mortgage repayments. This is excellent for those that want to know exactly how much disposable income they have left each month, and provides peace of mind and stability for mortgage payers.

These mortgages are usually set at a slightly higher interest rate than an adjustable rate mortgage when taken out. Having a fixed rate mortgage means that if the interest rate falls, you will still have to pay the higher rate, unless you re-finance the loan. However, many are perfectly happy to do this because it also works the other way – if the interest rate rises you will still pay the lower fixed rate.

Those on a tight budget or a fixed income can benefit from a fixed rate mortgage because of its static nature. Knowing exactly how much is coming out of your pay check for your mortgage repayment means that you can budget far more effectively and without having to worry about unexpected rises in repayments. Even as inflation kicks in and your income rises over the years, your mortgage repayments will remain the same, so you can enjoy a higher income without having to cope with higher mortgage repayments.

As with an adjustable rate mortgage, the early years of a fixed rate mortgage are spent mainly repaying the interest on the loan. It is during the latter years of the loan term that you will start to make an impact on the principle balance of the loan. However, throughout the loan term, during both the early and latter years, you can enjoy the peace of mind that comes with fixed monthly repayments.

Some lenders also offer fixed rates for a specified period, and your mortgage then reverts to adjustable rate upon expiry of this period, although it can often be extended for a further period. So, if you are buying your first home, or you are unsure whether you could afford to cope with rising interest rates for some time, you could take out a fixed rate mortgage for, say, ten years. If, after this period, you still don’t think that you can risk rising repayments, you could extend the period. Alternatively, you can then switch to an adjustable rate mortgage.

Back to more mortgage and real estate information

To teach and learn money skills, personal finance, money management, business, careers, and life skills please go to the Money Instructor home page.