What is a fixed-rate mortgage and how is it different from an adjustable-rate mortgage?

What is a fixed-rate mortgage and how is it different from an adjustable-rate mortgage?

Financial Planning | Dec 2, 2021 | 10 min read

The kind of loan whose rate of interest does not fluctuate during the entirety of its term is called a fixed-rate mortgage. This is what sets it apart from the other types of mortgages that are available in the market. Particularly the mortgages that have an adjustable rate. One of the most popular kinds of mortgage is the one that is fixed for a period of 30 years. It is followed by the 15 years fixed mortgage. There are a few lenders that do not adhere to these fixed terms, but instead, they let you set the terms according to your needs like 18 years or 20.

Advantages of fixed-rate mortgages

It refers to a set amount that is payable every month which is not prone to change. During the entire duration of the loan’s term, the same amount and interest are to be paid in a fixed-rate mortgage. It creates a pattern of predictability of the amount of interest you have to pay. You can also take the help of various loan charts to see how much interest you will have to shell out during the entire duration of the loan. It is also extremely straightforward and easy to understand. In case, the complexities of finance are too much for you to navigate, the uncomplicated nature of a fixed-rate mortgage leads to an understanding of the amount that you have to pay which can grant cause your mind to rest.

Disadvantages of fixed-rate mortgages

The monthly payment is not flexible so it cannot be decreased. The only way you can reduce your fixed-rate mortgage is by refinancing. Contrarily, its interest rate is higher than its counterpart such as an adjustable-rate mortgage (ARM) which has a comparatively lower rate. To begin with, the amount of money you need to spend on interest can really cut into your budget. If the term of your loan is 30 years, the possibility of you spending more on interest in a fixed-rate mortgage is much higher as compared to an adjustable-rate mortgage. In case, you don’t mind paying that much due to the benefits you receive in a fixed-rate mortgage, you could easily save even more if you opt for a 15-year fixed-rate mortgage. The main repayment is comparatively unrushed and relaxed initially. The amount of interest you are paying is higher, which results in reduced principal payment as compared to ARM, even if your payment every month is the same.

Difference between an adjustable-rate mortgage and a fixed-rate mortgage?

Currently, what sets them apart is the beginning rates that are very little to nothing at all for ARM as compared to fixed-rate mortgages. The thought is that if the risk remains the same but you have to pay the same amount, why to bother. Once interest rates become higher, customers might opt for adjustable-rate mortgages more, however, the difference between the two needs to increase considerably before that happens. While interest rates are beginning to recover from their pandemic slump, there is a possibility that they will still remain at the bottom for the foreseeable future. It is resulting in the arm’s appeal to wane in the economic upheaval society finds itself. If you want to sell your house prior to the resetting of the rates, ARM is the preferable option. However, all of this is based on whether the house rates will remain where they are, or go up.

Mortgage rates being the lowest ever, it would be advisable to opt for a fixed-rate mortgage. However, there is no prediction if this will continue as the pandemic keeps changing our day-to-day lives. This pandemic has imparted one main lesson which is that you cannot know what is going to happen in any sector of society. So, keeping this in mind, if you are looking to refinance or buy a house, fixed-rate mortgages are the best choice. Keep in mind all of the points we have highlighted above to make the right choice based on your circumstances. 

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