What Difference will it Make?
With interest rates currently at their all time low, many home buyers are wondering whether the time to fix their home loans is now. Rising interest rates can potentially impact your lifestyle significantly. Due to this, whenever you are deciding whether or not you should get your loan fixed, you should take into account financial flexibility, your budget and any future plans you might have.
What are the Advantages?
Having a home loan with a fixed rate will enable you to lock-in your interest rate for a specific time period. One year up to five years are the most popular terms. During that time, your monthly repayments and interest rate will stay the same regardless of whether or not the interest rate charged by lenders increases or not. Once the fixed term is over, you can either fix your loan once more or switch over to a variable rate loan.
Whether you are looking to purchase a second property or home or searching for your first home to buy, it can be the right time for you to opt for a fixed rate home loan. Having your home loan rate fixed is a way to manage risk. If rising interest rates could potentially impact your ability to pay your loan back in any significant way, then it makes a lot of sense for you to fix the rate.
Are There Any Disadvantages?
However, before you make an important decision such as fixing your home loan, you first have several important factors that you need to take into consideration. First of all, you will need to shop around to search for a lender who will offer you some flexibility. You also should get some advice on how it would work out in three to five years from when you fixed your loan. It might make more financial sense for you to fix your loan for a shorter time period as you continue watching market trends.
Is certainty something that is important to you? If so, then the main advantage to going with a fixed rate home loan is that it allows you to plan ahead and sleep better at night since you know ahead of time what your monthly obligation is. However, one drawback of opting for a home loan with a fixed rate is that a majority of lenders won’t allow you to pay your loan off early or make extra payments to any large extent without penalties being incurred.
Can I Have My Cake and Eat it Too?
If you still can’t decide, you can always try the split loan option which allows you to have part of your loan at a variable rate and part of it fixed.
After you have conducted your research and decided on the kind of loan to get, keep in mind you won’t get what you want unless you ask for it. If you are working with a mortgage broker, ask that the most flexible option meeting your financial needs be negotiated for.
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How Long Will You Be Staying in Your Home?
If you are purchasing a home and planning on staying in the home for a long time, you may want to consider a fixed rate home mortgage. Another benefit to this type of loan is that your payments will tend to stay the same over the life of your loan. This type of mortgage is best for those who are planning to stay in their home for a minimum of 3 to 5 years.
Australian lenders offer a variety of terms when it comes to fixed rate loans. The terms can range from one to seven, ten or even fifteen years.
The interest rate on a fixed loan remains the same over the lifetime of the loan. Payments will not fluctuate because of changes in the market. Your loan payments will be completely understandable and will be the same, depending on your loan terms. The most common loans are a 3 or a 5 year fixed rate loan. The 3 year loan offers lower interest rates and lower monthly payments. With the 5 year fixed rate loan, the interest rates will be slightly higher.
What Advantages Does a Fixed Rate Mortgage Offer?
Fixed payments are the primary advantage to fixed rate mortgages. The payment schedule is straight forward and you know exactly what you will be paying each month. This loan is the best option if you purchase a home when interest rates are low. This will allow you to lock in an affordable interest rate.
What Are the Disadvantages of a Fixed Rate Mortgage?
The disadvantages to this type of loan are minimal. However, you could get locked into a higher interest rate when it is compared to variable interest rate home mortgages. You will be committed to the interest rate, even if the interest rates decrease.
As you can see, there are many things to consider when deciding between a fixed rate mortgage and a variable rate mortgage. Determine how long you plan on staying in the home, any prepayment penalties and the interest rate to help you determine the best type of mortgage for your unique situation.Read More
What is the Deciding Factor?
Many people think that the main thing to consider when deciding between a fixed rate and a variable rate home mortgage is whether they believe interest rates will fall or rise. If they believe interest rates will increase, they will opt for a fix rate mortgage. Conversely, if they believe that interest rates will continue to decline, they will opt for a variable interest rate home loan. Unfortunately, interest rates are unpredictable. There is no economist or financier that can give you a 100 percent guarantee on what interest rates will do in the next year, much less than the next 30 years.
Most home buyers who choose a fixed interest rate do so because of payment stability. With a fixed rate loan, the payments will remain the same over the life of a loan. This means you will know exactly what you will be paying each month. The term of a fixed rate can vary from mortgage to mortgage. Some fixed rate loans are for a period as short as 12 months. Other loans remain fixed for 10 or 15-years.
Shorter-term fixed rates (6 to 12 months) often offer rates that are substantially lower than other mortgage interest rates. It should be noted after this short term, the interest rate will revert to a high rate.
Fixed rate mortgages offer limited flexibility and can have prepayment penalties.
Variable Rate Mortgage Loans
The payment of a variable loan will fluctuate, depending on the interest rate. The interest rate on a mortgage normally mirrors that of the Reserve Bank. Many variable rate loans offer a number of benefits, including no prepayment penalties, the ability to pay extra payments towards the principle at any time and much more. One reason that home buyers choose a variable interest rate is to keep payments low and allow for early payoffs. This is especially beneficial to those who plan to sell their home in the next couple of years.
Variable loans often feature lower fees and a lender may offer a package deal on the mortgage compared to a standard fixed loan. This means the buyer may have discounted fees or a lower down payment.
Which Loan Should You Choose?
When comparing the different types of loans, you need to compare loans with similar features. Instead of looking at the interest rates only, you need to look at the best loan based on your unique circumstances. Once you have determined the best type of loan, you should look at the different interest rates. Using this method will ensure that you are not being charged for features that you do not need.Read More
What Should You Be Asking?
First time home buyers often have a lot of questions concerning mortgages with fixed interest rates. These questions can include how much of a down payment is require and what the monthly payment will be on a specific loan. When calculating mortgage payment amounts, many people do not factor in the interest on the loan because it is difficult to calculate unless a fixed interest rate is chosen.
Many first time home buyers are on a strict budget. Therefore, they will choose a fixed interest rate so they will know how much their monthly payment will be over the lifetime of the loan. The payment on a variable interest rate home loan will change depending on the housing market. Variable interest rates may be less when interest rates are lower; however, these payments on a variable interest rate mortgage can change drastically over the length of the loan. Fixed interest rate loans do not change, which means your payments will not change.
What’s the Best Choice?
Most first time home buyers prefer to go with a fixed rate mortgage as their payments are generally lower. Additionally, the interest rate is dependent on your credit score and credit rating. Finally, if you purchase a more expensive home, your payments will cost more than a less expensive home.
Jumbo mortgages, for instances, generally have about a half a percent higher interest rate than other fixed mortgages. Additionally, these loans often require a higher down payment. Jumbo loans carry a significantly higher risk than more affordable home loans. As you can see, the size of your loan plays a role in the overall interest rate of the loan.
How do You Avoid Extra Costs?
Having a large down payment can lower your fixed interest rate. This is especially true for home buyers who are self-employed. Those who are self-employed or do not have verifiable income will need to take out a Low Doc or state income mortgage, which tend to have a higher interest rate. You can offset this by paying a larger down payment. Furthermore, if you pay 20 percent or more of the purchase price, you can avoid private mortgage insurance, which will lower your payments.
Those who are taking out a low doc or stated income mortgage may qualify for mortgage insurance. This is beneficial for those who are looking to lower their down payment. To be eligible for mortgage insurance, the buyer must have at least 5 percent of the purchase price for the down payment and have a good credit score.