Purchasing a home entails multiple decisions that can affect your life for years or decades.
The initial decision is whether to rent or buy a property. If you’ve decided to ‘purchase,’ the subsequent step is to find the ideal house for your family, which further involves a “fixed or floating interest rate” home loan decision.
Since this decision has financial implications, it demands serious analysis. So, what is the difference between the two, and which is better for you? Here are some ideas to assist you in making an informed selection.
What is a fixed-rate mortgage?
In a fixed-rate mortgage, the interest rates are fixed throughout the loan term, secured by your property, which your lender can confiscate if you default. These loans are widely used to finance both residential and commercial property.
How do fixed-rate mortgages work?
A home loan application is the first step in using a fixed-rate mortgage. The steps are as follows:
- Choose a lender and apply once you’ve decided you need a mortgage.
- While applying, inform the lender that you want a fixed-rate loan.
- If you meet the requirements, the lender will give you loan terms of 15 or 30 years.
When lenders give you a fixed-rate loan, they often do so with numerous rate options, rates that decrease as you pay more upfront to secure your loan.
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After your loan is closed, you will make recurring payments (typically monthly).
A portion of each payment will cover interest accrued between installments, and the remaining will go toward mortgage debt. In your mortgage’s initial years, a significant amount of each payment goes toward interest, whereas the majority goes toward principle in subsequent installments.
A fixed-rate mortgage has a fixed interest rate, payment schedule, and duration. If you pay more than the minimum each month, that additional money will be transferred straight to the outstanding balance on your loan.
Simply instruct your servicer to allocate the excess funds to your principal. The more extra payments you make, the sooner your loan will be paid off than the indicated period.
When Should a Fixed-Rate Mortgage Be Used?
A fixed-rate loan may be the best option if:
- You want to secure a cheap interest rate
- You are satisfied with the EMI you have agreed to pay. It preferably shouldn’t exceed 25-30% of your monthly take-home pay.
- You don’t want to deal with refinancing later on.
However, a fixed-rate loan is not always a choice.
If you have poor credit or can only afford a small down payment, you might not be able to get a fixed-rate mortgage. If a fixed-rate mortgage isn’t an option for you, or if you can qualify for a loan with a higher interest rate, you might want to look into another form of a mortgage.
Whether you’re planning a mortgage or a home loan refinance, a comprehensive search is always advisable before finalizing the decision. Experts at Tobias Mortgage have been providing excellent refinance in Roseville, Rocklin, and Lincoln for over 13 years.
Fixed v/s Adjustable-rate mortgages
Fixed-rate mortgage interest rates remain consistent during the loan’s life. In contrast, an adjustable-rate mortgage, or ARM, has an initial rate that remains consistent for the first several years of the loan (typically five, seven, or ten years).
After the introductory period, the ARM’s interest rate is determined by an underlying index, such as the prime rate. The rate is then adjusted regularly following the first adjustment, generally once a year.
Some lenders provide variable-rate loans in addition to ARMs. These loans are never fixed; instead, they fluctuate (or float) month to month based on an underlying rate, such as the prime rate.