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  • Fixed Rate

  • The interest rate on a fixed rate mortgage stays the same throughout the life of the loan. The most common fixed rate mortgages are 15 and 30 years in duration. Fixed rate loans can either be conventional loans or loans guaranteed by Federal Housing Authority or the Department of Veterans Affairs.  

    Advantages

    Payment is the same every month and the predictability makes it easier to plan your budget. You don't have to worry about future higher payments like you do with an adjustable-rate mortgage. You can also make extra payments to pay off your principal earlier, which reduces the amount of interest you will pay over the course of the loan. Most fixed-rate loans don't have pre-payment penalties. It also provides protection in a rising interest rate environment.

    Disadvantages

    It's difficult to qualify for fixed-rate loans. You will pay higher closing costs for a conventional loan. Both are because banks and lenders may lose money if rates go up. It is a large risk for a bank to take on a 30-year loan and they must make sure they are compensated correctly, or they can suffer large losses.

    Caution

    Some mortgage brokers will sell you a fixed-rate mortgage where the rate is only fixed for the first five years. Make sure the interest rate they quote you is good for the entire life of the loan. In a no-cost loan, the closing costs are rolled into the loan itself, so you will end up paying a little more over the life of the loan because you are paying interest on those closing costs.