Are Fixed-Rate Mortgages Still A Good Option?

12 March 2023

Are Fixed-Rate Mortgages Still A Good Option?
As interest rates rise, many homebuyers begin to question if it’s still worthwhile to fix their mortgage rate. While they can be beneficial when interest rates are low, the answer to this question ultimately depends on your individual circumstances and financial objectives as a homeowner.

When it comes to mortgages, a fixed rate means the interest rate is fixed for the entire duration of the loan. This allows you to budget out your monthly payments and ensure they remain affordable in the long run.

You may also find fixed-rate mortgages with shorter terms, such as 15 or 20 year loans. These are ideal for refinancing or those looking to build equity faster in their home.

An adjustable-rate mortgage (ARM) may be attractive to some homebuyers. These loans offer lower introductory interest rates, usually for five years, but their terms can be extended or adjusted later based on market conditions. When selecting an ARM, make sure it allows you to sell the house before the adjustment takes effect so as not to face a massive spike in payments afterward due to rate adjustments.

An ARM has some drawbacks, such as not knowing when your interest rate may adjust or how much it could rise. This could make adjusting your mortgage rate too costly if you only plan to stay in the house for a few years.

ARMs are a popular choice for first-time homebuyers due to their low introductory interest rates. However, they could pose risks in the long run.

An ARM’s introductory rate is fixed for several years, but after this period ends, your loan’s interest rate can change. Usually, changes are based on an index which is set about 45 days prior to your loan anniversary date.

With a fixed-rate mortgage, you cannot alter the interest rate without requalifying and paying an early repayment charge. This option may be costly, so be sure that you can handle higher monthly payments that a higher rate requires.

If you’re uncertain which mortgage is the best fit for you, speaking to a real estate agent or lender is a wise idea. They can assist in making an informed decision and explaining both the advantages and drawbacks of each option.

Are You a Long-Term Homeowner?
When applying for a mortgage, your lender will calculate how much money is affordable based on your income, savings and debt. This number is known as your debt-to-income ratio. This ratio takes into account all aspects of your finances: income, savings and existing obligations.

A lower debt-to-income ratio can enable you to secure a mortgage with an attractive interest rate, saving thousands of dollars in interest over the course of your loan. Furthermore, it may allow for the maximum loan amount available.