Fixed rate mortgages are the safest mortgage product currently available. A fixed rate mortgage is a mortgage loan with the interest rate remaining constant, or fixed, throughout the life of the loan. For instance, if the interest rate was set at 4% at the beginning of the loan's term, the interest rate will remain at 4% up to the final payment. This type of mortgage contrasts with mortgages whose rates can change, or "float", according to market conditions.
Fixed rate mortgages are the quintessential "classic" mortgage loan in the United States. They are stable, long-term mortgages that have several benefits to home buyers, no matter if they are buying their first home or their third. The monthly mortgage payment remains the same for the life of the loan, no matter if the term is fifteen years, twenty years or thirty years. This gives the homeowner stability in their mortgage, and for homeowners who are focused on building long-term wealth, this is exactly what they need.
There are three big advantages to a fixed rate mortgage:
1) The borrower is protected from inflation due to the fixed interest rate. Therefore, if interest rates increase, theirs will remain the same. On the other hand, if interest rates decrease, they can always refinance their fixed rate mortgage at an even lower rate, which is nothing but good news for them.
2) The new homeowners are free to plan for long-term goals because they always know what their monthly payment is going to be. With a fixed rate mortgage, they can plan for their income increasing or decreasing, as well as for life events, such as having children, their children getting married, etc.
3) The risk of interest rate decrease is eliminated, freeing the borrower to focus on other concerns.
A fixed rate mortgage is perfect for first-time homeowners, since the stability and risk-free nature of the loan appeals to those who are just starting to build wealth. Actually, fixed rate mortgages are wonderful for any home buyer, since the stability and the security apply regardless. This makes them the favorite of people who are seeking to build long-term prosperity.
The key to understanding these mortgage is the fact that the borrower is protected from both sides of the inflation/deflation coin. If interest rates go down, they can refinance; if they go up, they are protected from their interest rate increasing.