Fixed Rate Mortgages (FRM) are the traditional and most straight forward of mortgages and they are often referred to as a “vanilla wafer” mortgage loans. The interest rate and the monthly payments on these mortgages remain the same for the life of the loan. The borrower benefits from a stable, consistent payment and the resulting ease of creating a budget with fixed payments.
The most common fixed rate mortgages have either a 15- or 30-year duration, and account for 75 percent of all home loans.
Fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk to the lender, long-term fixed rate loans will tend to be at a higher interest rate than adjustable rate loans (ARMs).
The fact that a fixed rate mortgage has a higher starting interest rate does not mean that this is a worse form of borrowing compared to an ARM. If interest rates rise, the ARM cost will be higher while the FRM will remain the same.
When interest rates are low, the fixed rate mortgage is an easy choice. If your income is stable or increasing, and if you plan to own your home for 10 years or more, there’s probably no better deal available.
Advantages of Fixed Rate Mortgages
- They are simple and easy to understand compared to ARMs. You don’t have to worry about your interest rate changing, how the rate is calculated, or how the payments are structured.
- They offer security for buyers, and are appropriate for first-time homeowners.
- Well-suited for people who like to know what their monthly expenses are going to be, and for those who wish to keep their homes for a long time.
- Fixed-rate mortgages offer protection from inflation and rising interest rates.
Disadvantages of Fixed Rate Mortgages
- Higher interest rates than ARMs over the short-term.
- Higher monthly payments than a comparable adjustable-rate loan during the first years of the mortgage.
- They offer less flexibility than ARMs.
- Because of the higher monthly payment, you may be limited to a smaller mortgage than you could qualify for with an adjustable-rate mortgage.