The Pros and Cons of Fixed-Rate Mortgages

The Pros and Cons of Fixed-Rate Mortgages

Published by: REALTOR.com, Written by: Craig Donofrio (image by: Thinkstock), January, 2015

Fixed-rate mortgages are the most common type of mortgages available. Many home buyers prefer them to adjustable-rate mortgages for a number of reasons. But just because one is more popular doesn’t mean it’s right for you. FRMs have both pros and cons that you need to evaluate before choosing.

Pros of FRMs

A common reason many people choose a FRM is because it’s predictable. Unlike ARMs, whose monthly payments are tethered to changing rates, the interest rate on FRMs does not change for the life of the loan. This predictability is enough to give many home buyers peace of mind, which might be worth paying for.

The learning curve with FRMs is straightforward. It’s easy to shop around and compare rates. The math involved with figuring out your loan is also easy. With ARMs, you have to put in significantly more work to figure out the math, and their terms and conditions are more complex.

Generally, if you plan to keep your loan long-term and you believe rates can only go up, an FRM is usually not a bad idea. The stable, predictable payments are a trade-off for instances when rates decrease.

To recap the advantages:

• You know exactly what you’ll be paying each month for the life of the loan.
• There’s no stress if rates go up.
• It is easy to shop around and compare rates.
• The math involved with your loan is straightforward.
• It can save you money if you keep your loan long-term and rates go up.

Cons of FRMs

The biggest disadvantage of an FRM is having bad timing when locking in your rate. For example, if you lock in your rate in July at 4.2% but the rate continues to drop to 3.5% by September, you’ll kick yourself for not waiting. On the other hand, the market is notoriously difficult to predict.

You receive no advantage from falling rates, and whatever changes in interest rates occur do not matter because your loan is locked in. But you’re also free from having to worry about it.

Some home buyers choose to purchase a longer lock-in period and float their rate until they believe it won’t get any lower.

FRMs usually do not come with the low intro rates that ARMs frequently do. That can be disadvantageous if you don’t plan to see out the life of your loan—that is, you plan to sell or refinance it in the foreseeable future. That’s why some home buyers, like house flippers, choose ARMs over FRMs. However, those intro rates can also be troublesome if the buyer does not understand how to handle an intro, or teaser, rate.

To recap the disadvantages:

• FRMs may not be the best option for people looking to sell or refinance soon.
• You’re stuck with the rate you locked in until you refinance.
• Falling rates can give you a case of buyer’s remorse.

Always Understand the Loan

The 30-year FRM is the most popular mortgage in America, but that doesn’t mean it’s the right one for you. Still, many homeowners would rather deal with the stability of an FRM over the fluctuating payments of an ARM. Be sure you understand your loan’s terms and rates, and always compare rates before signing into a mortgage.

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The Pros and Cons of Fixed-Rate Mortgages

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