What is a fixed rate mortgage? Fixed rate is a rate it does not change for the entire length of the loan. If you are thinking of buying a home, you might wonder how a fixed rate mortgage works. You might...
If you are thinking of buying a home, you might wonder how a fixed rate mortgage works. You might also wonder whether such a loan would be the best option for you.
"A fixed rate is a rate that does not change for the entire length of the loan," explains Doug Perry, who has worked in the Consumer Markets Division for Countrywide Home Loans for 16 years. "It is contrasted most easily with an adjustable rate loan (ARM), where the rates depend on going rates.
"A fixed rate is a rate that does not change for the entire length of the loan," explains Doug Perry, who has worked in the Consumer Markets Division for Countrywide Home Loans for 16 years. "It is contrasted most easily with an adjustable rate loan (ARM), where the rates depend on going rates.
"In between that is a fixed period ARM or a hybrid loan, which is a loan that is fixed for a set period of time and then automatically converts to an adjustable rate loan. It really combines the best attributes of adjustable loan rates,mainly rates lower than traditional fixed rate loans,with the best attributes of fixed rate loans. Your payment will not change for a set period of time. Again, no one loan is perfect for every person. These are some great options that a loan professional like Countrywide is willing to review with the consumer without cost or obligation," says Perry.
With fixed period ARM hybrid fixed rate loans, the interest rate you will pay for a set time will remain the same. You will be guaranteed that rate for that amount of time, and the amount you pay back will not vary. Your rate will then convert to the lender's rate. If you know you will have to budget carefully during the first few years of your mortgage, you will know how much you will be paying each month. You won't have any unpleasant surprises when you pay your house payment.
If interest rates rise above what you are paying, you will be saving money each month. On the other hand, if rates drop, you will be losing money. Regardless, you will know how much your house payment will be each month.
A fixed period ARM, or hybrid fixed rate will usually last between one to five years. A true fixed rate however, will last ten years or more,the entire length of the mortgage.
When choosing the length of a fixed rate in a mortgage, a decision might be made on an opinion of whether interest rates are going to rise, fall, or stay about the same, and how comfortable you will feel having a payment that will not change - regardless of whether rates rise or go down.
Fixed rates have been very popular with some people - those who want to protect themselves against the unknown. Rates have been as high as 19% in the past. In recent years, however, rates have fallen, and those with a fixed rate could lose out on the benefit of falling rates.
On the other hand, if you have an adjustable rate, you might receive a lower initial rate, if you are willing to have higher monthly payments, if rates go up. You could also potentially qualify for a larger loan amount with an adjustable rate.
ARM rates are often based on the rate for Treasury bills. Rates can only be adjusted at certain time frames, and changes may be limited to 2% per year, with a cap around 6% during the entire period of the loan. Such a restriction will protect you, in case rates rise dramatically.
Another potential drawback of an ARM is that such a mortgage assumes a steady rise in your income. That can be fine, if it proves true, but can be a bad thing, if that is not the case.
There are variations on the two major types of loans, such as a balloon loan, useful if you are planning to move in a few years, which provides a fixed rate for a few years, but afterwards will require full payment. The best thing you can do in deciding whether or not to get a fixed rate is talk with a loan professional.
"They (potential home buyers) really need to be working with someone they trust, someone who is looking out for their best interest," says Perry. "They need someone that can really listen to what they want to accomplish with the loan and use a home mortgage as the financial solution."
