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By: Edward McCarthy
President: Sell By Owner Listings, Inc.
Fixed Rate Mortgage Loan
In choosing a mortgage loan for your home
you have a choice between an adjustable rate loan and a fixed rate
mortgage loan. The primary difference between the two is that the
interest rate with adjustable rate mortgage has the potential to go up
or down depending on economic factors while the interest rate for a
fixed rate mortgage loan remains the same throughout the life of the
loan.
The Pro's
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With a fixed rate mortgage loan monthly
payments remain stable over the course of the loan. Interest rates in
the economy can go up or down, but the interest rate for your fixed
rate mortgage loan remains the same. This means that your monthly
interest and principal payments will not change as long as you are
paying the loan.
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No unexpected increases in monthly
payments due to interest rate increase. Since the interest rate does
not change, you are not subject to increases with your monthly payment
as you would be with an adjustable rate mortgage. With a fixed rate
mortgage loan, you don't have to worry about income increases to ensure
you will be able to cover future mortgage payments.
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Easier to budget because your monthly
payments are stable. Since you always know what your monthly payments
are going to be, it is easier to budget from year to year when you have
a fixed rate mortgage loan.
The Con's
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Higher initial monthly payments as
compared to an adjustable rate mortgage. In the first few years of your
fixed rate mortgage loan, your monthly payments will be higher than if
you had an adjustable rate mortgage.
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A higher income is necessary to qualify
for a fixed rate mortgage loan. This is because the fixed rate mortgage
loan has a higher interest rate and subsequently a higher monthly
payment. Lenders need extra assurance that you will be able to handle
the monthly payment. Thus, the increased income requirement.
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May need to refinance if interest rates
drop. If market interest rates drop and you keep your fixed rate
mortgage loan, you will end up repaying much more in interest than if
you refinance. Should the time come to refinance, compare the amount
that you would pay in interest over the life of your loan to the cost
of refinancing and the amount you would save.
Repay the Fixed Rate Mortgage Loan in Half
the Time
One of the factors that attract borrowers to
the fixed rate mortgage loan is the ability to repay in 15 years
instead of 30. All the characteristics of a 30-year fixed rate mortgage
are present with a 15-year mortgage, but there are some key
differences. The interest rate with a 15-year fixed rate mortgage loan
will be lower than that of a 30-year. However, since you are repaying
the loan in a shorter period of time, the monthly payments will be
higher.
Is the decrease in interest rate worth the
increase in price? Usually, a borrower chooses a fixed rate mortgage
loan, not because of the lower interest rate, but because of the
decrease in time it takes to own the home. With a 15-year fixed rate
mortgage loan, the homeowner gains home equity quicker than with a
30-year.
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