As the title of this article suggests, I'm going to take you on a trip through the ups and downs of fixed rate mortgages. I think that buying a house, especially my first one, is the scariest thing I have ever done, and I have been in combat as a veteran of the military. For those of you who are still looking forward to buying your first home, let me quickly explain what it is and what it isn't. What it's not will be the easiest part to explain. It's not like going to a store and swiping your card to buy what you want. It's not even like buying a new car, though buying a new car is a little bit like this. It's like looking at a bunch of houses you hate to find one you like, only to find out it costs $10,000 more than you wanted to spend. So you make an offer and wait to see if the seller accepts it or sends you a counter-offer. Once the game of "offer/counteroffer" is over, you set a date for when the deal will end. At the end of the deal, you sit down and sign so many papers that Leo Tolstoy would be scared to death. Once that hour-long process is done, you own the house, but you have to pay for it for the next 30 years. It sounds good, doesn't it? Well, yes, actually, it is. But before you can sign all those papers, you need to figure out what kind of loan will work best for you. There are a few choices, and in this first part, I'll talk about the fixed-rate mortgage.
An Introduction to a Fixed-Rate Mortgage
As the name suggests, a fixed-rate mortgage is a loan for which the payments stay the same. When I say "constant," I don't mean that they are due every month (though they are), I mean that they don't change. If you get a fixed-rate mortgage and your monthly payments are $900, they will stay at $900 for as long as you have the loan. Nothing changes, it's set in stone, and you can set your clock by it: $900 a month for 30 years.
Pros of a mortgage with a fixed rate.
Having a fixed rate mortgage has a lot of advantages. I'd like to talk about two of them: the freedom it gives you to plan and the freedom it gives you with your money. Let's begin with the power to plan.
Making Plans
As we've already said, it's scary to be responsible for a debt of $150,000, $200,000, or even $1 million. But if you know that the most you'll ever have to pay is $900 a month (or whatever your payments end up being), that's a different story. I don't mean to imply that if you get a fixed rate, your mortgage payments will always be $900.) is a very reassuring fact to know. You can make sure you can always afford that amount by basing your budget on it. Having that amount set in stone is very helpful. Most people get financial freedom after getting a fixed-rate mortgage.
Freedom with money
The best way to explain what I mean by that is to describe a possible situation. Imagine a young couple who just got married, just graduated from college, and just started their new jobs. They choose to borrow money and buy a house. Because of how much money they make, they can only comfortably spend $500 a month. They know that this won't get them the house they really want, so they decide to stretch their money a lot and get a house that will cost them $800 a month. After two years, they each get a raise, which makes it easier to pay their bills. After another two years, they both get more promotions and move into management. Then, all of a sudden, they can easily afford to make payments of $900 a month, and later they can make payments of $1000 a month, but they don't have to. All they have to do is pay $800. When they pay more than $800 a month, the extra money goes toward paying off the principle. This helps them pay off their house much faster. When the house is paid off, you won't have to spend $800 a month on housing costs. You see, if you have a 30-year mortgage with a fixed interest rate, it will take you 22 years to pay off half of the principal because so much of your payment goes to interest. If you always pay more than the minimum payment each month, you can easily pay off a 30-year mortgage in 20 years.
Brief Summary
A fixed rate mortgage is a good choice for a young first-time homebuyer with a steady income. As was already said, it makes things more predictable and gives people the chance to be financially free sooner. This is the best choice for an older person buying a home for the first time. As retirement gets closer, being able to pay off a mortgage in less than 30 years is a very important skill to have. This may not be the best choice for buyers whose budgets are tighter and less stable. If that's the case, there are other mortgages that would meet their needs better. But, as with any mortgage or real estate decision, you should sit down with a professional who can look at your needs and make a plan that works for you.
