The primary benefit of a fixed-rate mortgage is that the interest rate never increases during the term of the loan, according to Freddie Mac. Changes in property tax and insurance may cause a borrower's mortgage payment to rise.
All lenders offer at least 15-year and 30-year fixed-rate mortgage terms. A 15-year term has higher payments with a lower interest rate. Because the length of the term is shorter, a homeowner builds up equity at a faster pace and pays less interest, explains Freddie Mac. A 30-year term has lower payments with a higher interest rate. Both types of loans protect homeowners from increased monthly payments if interest rates rise.
Although fixed-rate mortgages avoid the risk of rising interest rates, there are some disadvantages to taking the safer route, reports Bankrate. For example, borrowers with adjustable-rate mortgages experience a decrease in monthly payments if interest rates drop. A borrower with a fixed-rate mortgage must refinance to decrease payments, which is a time-consuming and expensive process. In addition, fixed rates can make payments too costly for some borrowers and do not offer the customization available with many adjustable-rate options.
When considering which type of mortgage to pursue, a borrower must first understand the financial commitment a mortgage requires, states Freddie Mac. Meeting with credible lenders and financial counselors is the best way to ensure a borrower obtains the knowledge needed for selecting a loan that works within his budget, risk level and overall goals.