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Fixed Rate Mortgage Pros and Cons Revealed  

When you are looking to purchase a new home or get a mortgage refinance, you will find that there is quite a variety of loan programs floating around.  However, they will mostly fit into two groups of loans, Adjustable Rate Mortgages, ARMs, and fixed rate mortgages.  Neither one of these types is necessarily better than the other, but there are pros and cons for each type.  Let's explore the pros and cons of fixed rate mortgages. 

The most common type of loan is a fixed rate mortgage because it offers security to the borrower.  They know that the interest rate will never adjust unless they do mortgage refinancing.  There are 30 year, 20 year, and 15 year fixed rate mortgages that are quite common, although other terms are offered by different lenders, such as a 40 year or a 10 year fixed rate loan.  Having the security of knowing that your interest rate will never be adjusted by the lender can bring great peace of mind.  The monthly payment will generally stay the same, although if you include your homeowner's insurance and your property tax in the monthly payment, those items can cause it to fluctuate on a yearly basis. 

The way loans are structured is that the majority of the interest is paid at the beginning of the loan while the majority of the principal is paid at the end of the loan term.  As you go throughout the term, you will see the principal portion increasing while the interest portion decreases.  If you can pay any extra amounts on the loan as you go, those amounts will go directly to the principal and can decrease the amount you end up paying for the loan as well as decreasing the term of the loan. 

There are many choices that a borrower has with a fixed rate mortgage, including mortgage refinancing and loan purchase programs.  You can even find a bad credit mortgage with a fixed rate that is reasonably competitive.  You will want to discuss these options with your loan officer. 

Now that we've discussed some of the pros for obtaining a fixed rate mortgage, let's look at the main con or drawback.  If you are planning to try to pay down your mortgage, a fixed rate mortgage may be too high for you to be able to pull additional money from your budget to make an extra payment.  This is where an ARM comes in.  These loans are generally at much lower rates during the first few years and the payments can be quite low, so it can be easier to make extra principal payments.