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If you are looking for a loan, it is important to assess the type of loan that is right for you. The most common are variable and fixed rate loans, the latter generally being considered more desirable, such as fixed rate mortgages.
But what if the rates go down?
A fixed rate loan is a great option for those who plan to stay in their home for an extended period of time or want to be able to predict the cost of their monthly mortgage payments. Here’s what you need to know about fixed rate loans and whether they are a viable solution for your situation.
What are fixed rate loans?
A fixed rate loan guarantees that your interest rate will not change.
They are a good option when you anticipate that mortgage rates might change, for example by following them on this page, and you can get a blocked price before that happens. However, the reverse can also be true: if market rates go down, you will still pay the same price you set.
So, the nature of a fixed rate loan is pretty self-explanatory, but there are some pros and cons that you need to consider, which we’ll explore below.
How much interest do you pay with a fixed rate loan?
Benefits of fixed rate loans
- Your payments on a fixed rate loan never change, which is advantageous for homebuyers who want predictability in their monthly costs. It will also benefit you if the value of your home goes up or if market rates go up. If you set a fixed rate when home values âârise, you can anticipate a lower mortgage payment in the future.
- You’ll likely save money on interest ratesbecause the interest rates on fixed loans are generally lower than variable rates. As a result, you’ll also save on interest over the life of your loan – money that you can spend on other financial needs, or even pay off your loan sooner.
- If you have a good credit score, you will be able to benefit from a lower fixed rate, which means that you will have a lower monthly payment. Lenders are more likely to offer conditions favorable to people whom they are convinced will make the payments on time, so they have less qualms about offering you a fairer offer on your loan.
Disadvantages of Fixed Rate Loans
- Fixed rate loans may come with higher application feesbecause you typically pay these fees to mortgage lenders to secure the fixed rate loan. These fees correspond to the loan origination fees and the cost of the mortgage insurance premium (MIP).
It’s important to note that the MIP will likely be a lot cheaper over the course of your loan, so they’re usually not a big deal.
- Because fixed rate loans are structured exactly according to the contract, anything that is not covered by the contract may have a charge, including a prepayment charge. This means that you could pay a premium to get out earlier, but over time you will lose the lower rates.
- Your payments on a fixed rate loan never change, which is also an advantage, but also a disadvantage if the interest rates fall for the whole market and you are already stuck on a fixed rate. Your payments will be based on what you originally locked in, so you won’t have a break from the lower interest rates offered to you.
What is the ideal situation to take out a fixed rate loan?
If you want to know if fixed rate loans are right for you, it’s important to know what the ideal mortgage term would be for you. The term of the mortgage is the key term that determines the interest rate you will pay, and it is essential that you find the term length that is right for you.
The ideal mortgage length for you should depend on the amount of money you need to borrow, the market rate, and how long you plan to own the home.
For example, you can often get a lower interest rate for a longer term than for a shorter term. So if you are buying a home to renovate that you plan to flip and sell, a fixed rate loan may not be right for you.
On the other hand, if you are buy your first property for the long term, a long term fixed rate may be ideal for your situation. When you are borrowing a huge amount of money and want to use a large chunk of that money to buy a house, a long-term fixed rate will save you money in interest because you won’t have to pay it back. so fast.
It’s never wise to make a decision based on emotions – it’s a good idea to do your research and find out the details that make sense for your specific situation.
When shopping for a mortgage, be sure to ask questions and compare lenders, so you can find the lender who will offer you the lowest interest rate and the best details.