As the name says, a fixed rate mortgage is a mortgage where for the whole duration of loan, interest rates are fixed. Simply put, the interest rate in a fixed rate mortgage never changes. Fixed rate mortgages are popular of all other type of mortgages as about 75% of all mortgages that are taken for a home purchase are fixed interest rate mortgages. Largest benefit of a fixed rate mortgage is that you always know exactly what your mortgage interest and principle amounts are at any given time during the life of the mortgage. this helps you keep your budgets in shape.
Fixed rate mortgage offers security and peace of mind as you are not worried about sudden changes in interest rates. For example if the lending bank offers 30 year fixed mortgage loan to a home buyer and both agree on a 5% interest rate. This 6% rate will be fixed for entire 30 year period for which mortgage loan was given. It does not concern the buyer or seller if the market rate increases to 6% or decreases to 4%. Home buyer will continue to pay 5% interest rate and bank will be content with that. Therefore Fixed Rate Mortgage rate applies same interest rate to monthly installments throughout the life of loan and it make possible a fixed monthly installment.
Main Benefits of a Fixed Rate Mortgage
1) In comparison to Adjustable rate mortgage, A Fixed rate mortgage is easier to understand and less complex.
2) As it is more secure loan, It is widely adopted by first time home buyers.
3) It suites two kind of buyers, First those who have a steady fixed income like salary etc. & Second those who wish to keep their houses.(does not suit investors)
4) As Interest rates fluctuate a lot, risk perceived by lenders is higher in fixed rate mortgage so the rate of interest is normally bit higher than adjustable rate mortgage.
5) Since the risk perception is higher in Fixed rate mortgage, Lenders usually ask for higher initial monthly payments compared to those of adjustable rate mortgages.
6) Fixed-rate mortgage is less flexible than adjustable rate mortgage.
On the other hand in Adjustable rate mortgage the interest rate is not fixed and it changes during the life of the loan. Usually the changes are linked with an index rate like LIBOR and move in accordance to it. In a fixed-rate mortgage, your interest rate stays fixed for the entire life of the mortgage.