If you're meeting with lenders about a possible loan, you're likely hearing a lot about fixed-rate mortgages, the most popular loan option. But why do most homebuyers prefer a fixed-rate mortgage?Long-term, fixed-rate mortgages are preferred by most homebuyers because they offer security and stability. The interest rate does not fluctuate over the life of the loan, so the total amount of principal and interest always remains the same. The monthly payment can change, however, if local property taxes, which are normally part of the monthly mortgage payment, increase.
Adjustable rate mortgages, or ARMs, are another option, but these fluctuate with the market, and so they offer less stability than fixed-rate loans. Because the life of a fixed-term loan is usually long – anywhere from 15 to 30 years – you have plenty of time to repay it and there is no call provision written into the mortgage. A call allows the lender to demand the balance of the loan be paid in full before the actual payoff date.
On the negative side, the interest rate on a fixed mortgage is usually two or three full points above the current rate on an adjustable rate loan, at least initially. But for buyers seeking security and the comfort of knowing what their payments will be year after year, this is a small price to pay, especially if they have no plans to sell in the near future. If rates drop, they may be able to refinance their home loan and get a lower rate.
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