Fixed Interest Rate, Fixed Interest Rates
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A fixed interest rate loan is one for which the rate of interest remains unchanged for the entire term. A mortgage with a predetermined rate of interest remaining applicable through the entire term is also called a fixed-rate mortgage. Via a fixed loan, an investor can reduce exposure to market dynamics.
Factors Governing Fixed Interest Rate Loans
A loan is usually based on current interest rates. So, the decision to opt for a fixed interest loan depends on the borrower’s estimate of the market. The benefits of a fixed interest rate loan depend on current and future market conditions. If the prevailing market rates are relatively low, it implies a possibility of rising in the near future. In such situations, it may bebetter to opt for fixed interest rate loans.
Fixed interest rate does not mean that the interest amount will remain fixed for all mortgages. The interest amount is highly dependent on the amortization period of a loan. The term ‘amortization’ refers to the payment of the loan amount in periodical installments. Simply put, the tenure of the loan affects its interest rates.
The most popular mortgage terms are 10, 15, 20, and 30 years. A 30-year mortgage allows minimal monthly payments. However, the overall amount of interest is much higher. Short-term fixed interest loans also offer low interest rates. However, the monthly payments of short-term loans are higher. This facilitates the repayment of the principal amount in a shorter period and reduces the overall amount paid as interest.
Pros and Cons of Fixed Interest Rates
The biggest advantage of a fixed interest loan is that the borrower remains safe against a probable increase in interest rates.Also, it helps the borrower to make a correct estimation of the amount he/she has to pay as repayment. The downside to this is that it is difficult to qualify for fixed interest loans when interest rates are surging. Also, the affordability factor scores low when the current fixed interest rates are spiraling.
The decision to buy a fixed interest loan is not an easy one. Several financial experts pinpoint that in normal economic scenarios, an individual pays lower interest with variable interest mortgages than with fixed interest loans.
