Understanding Fixed Rates

Many people who are shopping for a mortgage loan, do not like the idea of an adjustable rate loan because they want to be sure their monthly mortgage loan payment will remain the same throughout the life of their loan. This is an understandable concern since being able to budget for a consistent payment can make a consumer’s financial life easier to plan.

So rather than an adjustable rate mortgage loan, which has an interest rate that fluctuates in response to the index to which it is attached, consumers who want to make the same payment every month should opt for a fixed rate mortgage loan.

Fixed rate mortgage are set when the loan originates and do not vary in response to outside factors such as a change in interest rate indexes. However, it is important to note that this rate will likely be slightly higher than that typically charged for adjustable rate mortgage loans.

This is because lenders want a return on the risk that during the term of the loan interest rates will increase periodically and the lender will miss the opportunity to take advantage of these higher rates because the money they have loaned you is already locked into a constant, long-term rate.

The benefit to the consumer is that even though the rate may be slightly higher when viewed in the context of the current market as reflected by adjustable rate mortgage loans, they can rest easy knowing their fixed rate will not go up when the market changes. That makes it easier to plan for budget needs into the future as well. Choosing a fixed rate mortgage loan can be an especially wise choice when current interest rates are low.