Fixed Rate Mortgages – The Ups and Downs
For those of you who find yourselves still anticipating the purchase of your first home, let me give you a brief rundown of what it is and what it isn’t. What it isnít will be the easiest to tell you about. It isn’t like going to the store and buying what you want by swiping your card. It isnít even like buying a new car, although the new car buying experience is a little bit closer. It is like looking at dozens of houses that you hate in order to find one that you like, only to learn that it is $10,000 more than you wanted to spend. So you make an offer and wait to see if the seller takes the offer or sends back a counter-offer. Once the game of offer/counter-offer is through you set up a closing date. At the closing, you sit down and sign enough papers to make Leo Tolstoy quake in his boots. Once that hour devouring procedure is done, the house is yours and you are in debt for 30 years. Sounds appealing, doesn’t it? Well, actually, it really is. But, before you get to the point where you can sign all those papers, you have to decide on what kind of loan will be best for you. There are a couple of different options and, in this first installment, I will discuss the fixed rate mortgage.
Overview of a Fixed Rate Mortgage
As the name would suggest, the fixed rate mortgage is a loan that has constant payments. By constant, I don’t mean that they will be due every month (although they will), rather I refer to the fact that they do not change. If you get a fixed rate mortgage and the payments are $900 per month, they will remain at $900 for the duration of your loan. Nothing changes, it is set in stone, and you can set your clock by it, $900 a month for 30 years.
Benefits of a Fixed Rate Mortgage.
There are a number of benefits to having a fixed rate mortgage. I would like to discuss two of them, the planning power that it gives, and the financial liberty that you can take from it. Let’s start with the planning power.
To take on the responsibility of a $150,000, $200,000, or even $1million dollar debt is, as a mentioned before, very scary. But, to know that all you will ever be required to pay is $900 a month (or whatever your payments end up being. I don’t in any way want to insinuate that all mortgage payments are going to be $900 if you get a fixed rate.) is a very comforting piece of knowledge. You can plan your budget around that amount and make sure that you can always afford it. It really helps things out to have that amount set in stone. The next thing that most people get out of a fixed rate mortgage is financial liberty.
What I mean by that would be best communicated in the description of a hypothetical scenario. Picture a young couple, just out of college, just married, and brand new at the jobs in their respective careers. They decide to take out a loan and buy a house. They, because of the salary restrictions that they are working with, can only comfortably afford $500 a month. They know that this won’t get them the house that really want so they decide to stretch financially and get a house that will run them $800 a month. After two years they both get promotions and their bills get easier to pay. After another two years, they both move into management and get more promotions. Suddenly they find themselves in a position where they can actually comfortable afford to make $900 a month payments, and later on, they can make $1000 a month payments, but they don’t have to. All they are required to do is $800. Every amount of money that they pay over $800 in a month goes towards paying off the principle and this gets their house paid off much faster. When the house is paid off, there is $800 a month that is no longer being tied up in living expenses. You see, in a fixed rate, 30-year mortgage, it will take 22 years to pay half of the principle because so much of that money is going towards the interest. If you consistently pay more each month than the minimum payment you can pay off a 30-year mortgage in 20 years easily.
For the young, first time homebuyer with a solid income, a fixed rate mortgage is a pretty good option. It allows, as was earlier stated, predictability and the possibility for earlier financial liberation. For the older first time homebuyer, this is the best option. The ability to pay off a mortgage in less than 30 years is something that becomes very important as retirement approaches. For the buyers that are on a much tighter, less predictable budget, this may not be the best option. In that case, there are other mortgages that would be better suited to their needs. But, as with all mortgage and real estate decision, sit down with a Lend Plus licensed mortgage banker who can assess your individual needs and come up with a plan that is right for you.