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Fixed Rate Loan (Mortgage Loan)

Understanding a fixed rate loan

A mortgage that has an interest rate that stays the same for the entire length of the loan is called a fixed rate loan or fixed rate mortage. If you are searching for a fixed rate loan, then you will be shopping around for the best interest rate you can find. Once you lock in the rate, it will stay the same until you either sell the home or refinance at a different rate. Most people choose a fixed rate loan over a variable rate unless the current interest rate is quite high.

Benefits of a fixed rate loan

Being able to know your budgeted monthly payments is one of the benefits of a fixed rate mortgage loan. Because the rate will not change, the amortization schedule can be set up for the entire length of the loan and the payments divided equally so that they are the same each month. This can be very helpful as you plan for your future financial needs. In the current housing market, the interest rates are very low, so you will definitely save on interest paid over the lifetime of the loan by signing up for a fixed rate now. Another benefit is that most of the time, this type of loan does not have any prepayment penalties, so if you can pay extra on the principal you can reduce the interest and shorten the term of the loan.

Disadvantages of a fixed rate loan

Missing out on lower payments when the interest rate goes down is the biggest issue with a this type of mortgage. However, most people deal with this problem by refinancing the home at the lower fixed rate. If you are not able to refinance, then you will be stuck with payments at the higher rate of interest, which means that you will end up paying more interest over the life of the loan.