Fixed-Rate Mortgages

Lock in your mortgage at a great rate

The question many homebuyers have when financing the purchase of a house is whether to get a fixed-rate or adjustable-rate mortgage. Those who took out loans between 2003 and 2006, in hindsight, will tell you the answer is clear: lock in a fixed rate, and each year your payment will represent a smaller percentage of your gross income until you've paid the whole thing off.

In recent years, interest rates have been extremely low - as low as they have ever been, historically. In 2005, rates began to move upward with the spread between 30-year fixed-rate mortgages and one-year adjustable-rate mortgages closing. What does this mean for the consumer? Well, for those who took out adjustable-rate mortgages in 2003, they are now looking at rates two percentage points higher than back then, and only slightly less than the fixed-rate mortgage. While the rate of interest today is still lower than that of a fixed-rate mortgage, chances are high that many buyers took out much bigger mortgages as a result - mortgages they can no longer afford.

The beauty of fixed-rate home loans is that your payment is permanently set at the same dollar amount, allowing inflation to work for you, rather than against you. As your income rises progressively during your career - your home equity increases as home prices rise and interest owed drops - your net worth rises. Sometimes, the less obvious choice is the right one.

The thing to keep in mind with fixed-rate mortgages is that the principal portion of your monthly payment in the first few years will be very small, almost negligible. For this reason, most experts recommend this kind of mortgage if you are planning to remain in the same house for a number of years. If not, some sort of adjustable-rate product makes more sense. Further, when interest rates are high, locking in for an extended period, especially if you're considering a 30-year term, makes absolutely no sense whatsoever.

In the end, only you can decide what's best for your family. If you are interested in providing a stable financial picture, the fixed-rate mortgage is the only way to go; at least for the very near future.

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