Fixed Rate Mortgages: Pros and Cons

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It’s December! At the beginning of November, we discussed the benefits and disadvantages of the variable rate mortgage. A month later, it’s time to talk about the fixed rate mortgage (FRM).

The interest rate for a fixed rate mortgage stays the same for the full term of the mortgage. Payments are set in advance for the term, providing you with the security of knowing precisely how much your payments will be throughout the entire term.

Fixed rate mortgages can be open (paid off at any time without breakage costs) or closed (breakage costs apply if paid off prior to maturity). They are also available under a variety of terms, but regardless of the term of your loan, your interest rate will also be impacted by a range of other factors:

Credit score
How much money you’re borrowing
Value of your home
Location of your home
Size of down payment

Fifteen or thirty years?

Thinking in the long term, FRMs are usually available with 15 year or 30 year plans. For a 15 year plan, the FRM will come with a lower interest rate and end up paying alot less over the time of the loan, but with a much higher monthly payment than a 30 year plan. If you want a lower monthly payment for your budget, 30 years might be better for you, but building equity in your home will take much longer.

Basic advantages?

In the case of variable-rate mortgages (VRM), interest rates fluctuate regularly so payments might increase every few months. Not the case with FRM though! The main offering is that your loan terms are protected when interest rates rise. The stability of payments and rates will make it easier to evaluate different lenders than with VRM.

But what’s the drawback?

Homebuyers who decide on a variable-rate mortgage can easily take advantage of falling interest rates. If you’re on a FRM, you’d have to completely refinance if an interest rate is down – making things very complicated if you decide to go ahead with that.

A fixed interest rate and stable monthly payment also allow you to budget for your monthly mortgage payment and not lose sleep worrying that rising interest rates will force you to cut back in other areas or even put your payment out of reach in the future. For example, if you used an adjustable-rate mortgage, and interest rates went up sharply, you could be paying hundreds more on your monthly mortgage payment.

We hope this basic information will help you make things clearer in your decision making when choosing between a fixed-rate mortgage and a variable-rate mortgage. One isn’t necessarily better than the other, as proved by the pros and cons of each. Everything depends on your long term plans and your financial situation. Some families are lucky to the point where they are able to purchase the house all at once, and never have to worry about a mortgage in the first place! This is very rare, and it is generally recommended that everyone gets a mortgage.