Fixed Mortgage – Pros and Cons
Investing, gaining profits and suffering losses is now a part of daily life of every person involved in any sort of financial/economic situation. Hence, the need to be extra careful about one’s own investment and money-related matters is quite important.
The term “fixed mortgage” or “vanilla wafer mortgage loan” is a term used to refer to where the rate of interest on the loan remains same throughout the term of the loan. Unlike in loans where the SI (simple interest) on the loan is fluctuating/floating, in the fixed mortgage loan the payment amount and the duration of payment are fixed. As simple and convenient it might appear but it isn’t as simple. There are many attributes attached to the fixed-mortgage plans and one needs to know the inside-out of the plans before making conclusions and decisions.
Fixed mortgage is dependent on values like the amount of loan, duration, compounding frequency, interest rate. Also in fixed mortgage the person paying back the loan benefits from a convenient and consistent single payment and has ability to plan a budget on this fixed cost. The popularity of fixed mortgages in highest in USA and in some countries the fixed mortgages are not even available other than on short-terms. Before getting into complications of Do’s and Don’ts of “fixed mortgage”, let us identify all the pros and cons of it.
The pros of fixed mortgage:
Such fixed rate mortgages offers one to take the chance of borrowing money on a long-term basis without having to worry about the interest rates. As a consumer, this is quite a favorable option and consumers are quite reluctant to take such options whenever possible and available. Also, fixed mortgage monthly payments are lower as put in comparison to those on 15-year loan and this is because here the loan is amortized over a long period of time. This lower monthly payment is in itself a benefit for the customer/consumer who can free up money and can pour into investments that yield more and more profits. And also with higher interest bills increases the amount of consumers can deduct at tax time by eliminating their federal income tax liabilities.
Now let us take a look at the con,
The cons of fixed mortgage:
Borrowers will now build equity at a very slow pace majorly due to the fact that payments during the first several years go largely towards interest rather than principal. Also, the over- all interest bills might sum up to being higher because of the long term policy of amortizing the term. And not to forget, the interest rates are higher than on 15-year loans.
The 30-year mortgage plan is the popular choice which offers the lowest monthly payment but the trade-off actually is that for low payment significantly adds higher overall cost because of the extra decade. Whereas, short mortgage plans offer lower interest rate, allowing a larger amount of repaid principal with each mortgage payment and thus the overall costs are lesser.
These are very much generalized pros and cons of fixed mortgage and before attempting to invest and take up any loan these points are markers to be the first steps. There are few other things that need to be into consideration like for example if we take an example of 15-year loan, then it is always wiser to find ways to repay the mortgages in some way or the other and whittle away with it in the principal each month so that the loan is paid before 30 years.
Also, enquiring about the right options one can opt for is very necessary before such great monetary decisions. Always try and find out the alternatives and policies, terms and conditions of mortgages and choose according to convenience. Compare the principal mortgage rates and interest rates that you’re planning to take up.
Another important aspect in the market of mortgages is that of ARM or the Adjustable Mortgage rates which are a back-support system for people who feel dicey about the FRM system. This enables you to adjustment frequencies and adjustment indexes. ARMs seem comparatively attractive because they offer low initial payments, enabling one to qualify for a larger loan and in a falling interest rate situation, allowing the borrower to enjoy lower interest rates without the need to refinance.
But also one has to see its down side where with an ARM, your monthly payment may change frequently over the life of the loan. And if you are taking on a large loan, you could be in trouble when interest rates rise and you may end up reckless.
So before investing, there has to be a clear mind set-up for what are your requirements from the mortgage and only after from inquiry one must decide this. Always keep a back-up option in hand and always read the term details carefully.