An Overview of The Pros and Cons of Fixed Rate Mortgages

As the subprime mortgage crisis of 2007-2009 has recently illustrated, there are many compelling and persuasive reasons for homebuyers to lock in a fixed mortgage rate, whether for fifteen or thirty years. Many of the homebuyers facing foreclosure as a result of the subprime mortgage crisis opted for adjustable rate mortgages that covered principal amounts they could not afford. For the first few months, many met the payments, but when the adjustable rate mortgage rates reset, they could no longer afford the monthly payments.

The pros of fixed mortgage rates include the removal of uncertainty concerning monthly payments. Once you lock in that fixed mortgage rate, you know how much you will owe every month for the next fifteen or thirty years. Adjustable rate mortgages can yield unmanageable monthly payments, and that kind of volatility can wreck havoc with different types of homebuyers. Homebuyers who might be adversely affected by the volatility of adjustable rate mortgages include those with high expenses, such as parents; those with unsecure employment, such as retail; those with variable income, such as sales positions; and/or those without other assets (stocks, bonds, or mutual funds in taxable accounts, or rental income from property) to tap in case of a loss of income.

Another pro of fixed rate mortgages, as relates to fifteen-year terms, is that you can build equity in your home relatively quickly. Home equity allows you easy access to a home equity line of credit in case of emergency, and mitigates the risk of loss in case you must sell your house quickly.

Now, for the cons of fixed mortgage rates: thirty-year rates are generally higher than those on adjustable rate mortgages (although depending on the ARM adjustments, there may be months were the adjustable rate mortgage monthly payments are far higher than those of fixed rate mortgages). Another con of fixed mortgage rates is that interest rates may decrease shortly after your purchase your home. You will have locked into a fixed rate mortgage far higher than necessary and you may not be able to refinance easily. The result: you wind up paying higher monthly payments than you might have had you waited a few months or a few years to buy. A last con of the fixed rate mortgages, particularly thirty-year mortgages, is that you do not build up equity quickly. Depending on the adjustable rate mortgage terms and market conditions, you may very well build up equity in your home far quicker with a thirty-year adjustable rate mortgage than with a thirty-year fixed rate mortgage.

Despite all the pros and cons of fixed rate mortgages, fixed rate mortgages are not inherently better than adjustable rate mortgages. The decision to obtain a fixed rate versus an adjustable rate mortgage depends on your own financial circumstances.