Fixed-Rate Mortgage Payment Plans

A fixed-rate mortgage is generally considered more desirable than an adjustable-rate plan. With a fixed rate, you can be certain of your mortgage payments for the entire life of your loan. This helps with budgeting, and it also assures you know the total cost of ownership for your house prior to signing a contract. If you are seeking a fixed-rate mortgage, consider the requirements, benefits and alternative options prior to making a final decision.

Securing a Fixed-Rate Mortgage

Lenders set higher requirements for a fixed-rate mortgage than an adjustable-rate mortgage. The reasoning is simple: if a borrower has an uncertain credit history or income, a lender would like to reserve the right to make changes to the mortgage in case of any problems. Therefore, if you do not meet credit and income requirements, you may have to settle for an adjustable-rate loan. One method to overcome this problem is to seek a federal guarantee through the Federal Housing Administration (FHA). You can also elect to place a larger down payment or purchase a high level of mortgage insurance. 

Benefits of a Fixed-Rate Mortgage

When you qualify for a fixed-rate plan, there are two major benefits: first, you will know the total expense of your loan up front, and second, you will know each monthly payment well in advance. This allows for easy creation of a budget for the loan. It also allows for easier management of the payments, making it less likely you will miss a payment or underpay. With an adjustable-rate loan, you may be surprised by a rate increase that drives up your monthly payment. This can place you at risk of missing the payment, ultimately threatening the security of your mortgage.

Downsides of a Fixed-Rate Mortgage

For many borrowers, the ability to pay a mortgage will change over the life of a long loan. For example, a first-time homeowner may have a small initial budget. If she remains in the home for 10 years or more, her ability to pay will increase drastically. The initial years in a new home can be very stressful. Further, a homeowner may have to settle for a home she will soon outgrow because the initial payments to afford a more permanent property would be too high.

Alternatives to a Fixed Rate Mortgage

The enticement to pay less in the beginning of a loan is one argument for an adjustable-rate mortgage. The homeowner can purchase a more expensive property that she anticipates being able to afford in the future. Since the rate is low in the initial years of the mortgage, the first few years of payments are also low. However, these loans are very unpredictable and unstable. A borrower who fails to increase an income to the expected level can quickly end up in a mortgage that is unaffordable. Further, the lender can raise the rates to extremely high levels if there is no limit on the adjustment, increasing the cost of the loan arbitrarily. 

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