What You Need to Know About Fixed Rate Mortgages

When you’re buying your first home, establishing the mortgage financing can be a dizzying experience. Fixed rate mortgages seem to many like the best option, but mortgage financing is not a one-size-fits-all financial decision. Before you make a decision either way, find out what you need to know about fixed rate mortgages. Then, make a decision as to whether it’s the right financing option for you.

Same Mortgage Payments

Fixed rate mortgages offer a sense of comfort to most homebuyers because borrowers know the interest rate and monthly mortgage payments stay the same month after month. For example, if you purchase a home today using a 30 year fixed rate mortgage and your monthly mortgage payment is $1,200, you know that for the next 30 years your mortgage payment is going to be $1,200 (if you even have the mortgage for the next 30 years).

Interest vs. Principal

One of the biggest downsides of a fixed rate mortgage is that the majority of the monthly mortgage payment is made up of interest - interest that you are paying to the lender, meaning you end up paying far more than 100% of the principal balance of the mortgage in the form of interest. A borrower doesn’t really start to chip away at the principal portion of a fixed rate mortgage until about the halfway point. For a 30 year fixed mortgage, this means you’re not reducing a significant portion of your principal balance until about 15 years into it and for a 15 year mortgage, principal reduction starts at about the seven and a half year mark.

There is no doubt that the fixed rate mortgage offers a sense of safety and security to borrowers. On the other hand, how secure can you really feel when you realize a fixed rate mortgage has you paying twice the amount of the price of your home when all is said and done?

When a Fixed Rate Mortgage is the Best Option

Mortgages are not one-size-fits all financing options. The type of mortgage that is right for your neighbor may be disastrous for your personal financial situation. Also, there is a major misconception that fixed rate mortgages are always the best option. Always is a strong term and there aren’t many things in this world that are “always.” The same is true with fixed rate mortgages.

So when is a fixed rate mortgage the way to go?

Personal Situation

The first aspect of your life you to need to review is your financial situation. Ask yourself the following questions to gain a better understanding of where you stand.


o How long will I realistically live in or own this home? No matter how many years you say, see if there is a mortgage that matches or comes to close to the number of years in your answer. For example, if you say five years then a mortgage fixed for five years may afford you a lower interest rate than a 30 year fixed.

o Do I live on a fixed income or will it stress me out if my monthly mortgage payment fluctuates? If you need to know exactly how much your monthly mortgage payment is going to be at all times or it stresses you out to think of your payment changing, then a fixed rate mortgage is the most beneficial one for you.

o Did I have my past mortgage(s) for the entire time I lived in the home or did I refinance or sell before the end of the mortgage? The national American average reveals that homes are refinanced or sold in five to seven years. This means that it’s rare, if not non-existent, to hold a mortgage for a 15 or 30 year period. So if you can get a lower interest rate and lower monthly mortgage payment with another type of fixed rate or variable rate mortgage then it may be worth looking into it.

Interest Rate Environment

The other major item you need to consider before deciding on a fixed rate mortgage is the current interest rate environment. If the current interest rates are low, then locking in on the low rate with a fixed rate mortgage probably is the best way to go. If interest rates are high and are expected to drop in the near future, then a fixed rate mortgage may not be the best option as part of your long-term strategy.

When is a fixed rate mortgage the best option? It depends on your personal financial situation, emotional state and current interest rates. Long-term and short-term considerations can also affect your decision, so keep all of these things in mind when choosing your next mortgage.