What Is A Fixed-Rate Mortgage?

If you are considering options for financing your home, then you might have heard the terms ARM and FRM thrown around. However, you might not be sure exactly what they mean or what the differences are between the two. To help you get a better idea of how your home loan might work, here is an overview of fixed-rate loans, also known as FRM's:

What is a fixed-rate mortgage?

In an FRM, you lock in your mortgage at a specific interest rate. You will also be given a very exact schedule of your future payments for whatever the duration of your loan is. This schedule will tell you exactly how much you need to pay on every payment date and how long the loan will last.

One of the big benefits of an FRM is that every payment will be the same size. Your first payment will be the same size as the second and the third, and so on and so forth.

Why is a fixed interest a good thing?

Firstly, knowing how much you need to pay and when you need to pay it will allow you to plan out your budget years in advance. You will never be hit with an unexpected rise in your mortgage payments, which could happen with an adjustable-rate mortgage.

Secondly, your interest rate will always be stable and won't be affected by other factors. Other types of mortgages can unexpectedly become very expensive, very quickly, but you know exactly what you are going to get with an FRM.

What is a situation where an FRM would be better than an ARM?

If the interest rate on an ARM rises over the course of the mortgage's span, then you could end up paying a lot more with an ARM than you would pay with an FRM. Thus, an FRM can be much more attractive than an ARM in the event that interest rates rise.

As was mentioned earlier, it's a lot easier to plan your budget with an FRM than an ARM. Spikes in the interest rate on an ARM can disrupt the planning of your financial future, which could be incredibly frustrating.

What is a situation where an ARM would be worse than an ARM?

Conversely, interest rates could start low and stay low for an ARM, or they could rise but not enough to surpass the interest rates on an FRM. In these cases, you would end up paying less for an ARM than you would need to pay over the span of an FRM.

Keep this information in mind when looking at homes for sale. For more information, contact a local real estate company.