One of the first things people will say when you mention you start the process of buying a home for the first time is to be sure to get a fixed-rate mortgage. Why? What is a fixed-rate mortgage and why do so many people recommend them? Is it always the best option to select?
Let’s think about some of these questions. First, what is a fixed-rate mortgage? Well, let’s start with the definition of a mortgage before we get into the “fixed-rate” aspect of them. A mortgage is a loan collateralized by (secured by or borrowed against) a home or other real estate. In other words, the borrower gets money from a bank or other financial institution to purchase a home, agreeing to pay it back based on the terms of a contract (amount of time and at a certain price aka the interest rate). The borrowed money is backed-up by the actual property, so if the borrower doesn’t pay according to the contract, eventually the bank can (and will) have the sheriff kick out the borrowers and take possession of the home.
So then, the interest rate is the price of borrowing money or “cost” of borrowing money. Say wha??? Yeah, just like eggs and bacon have a price at the grocery store, so does borrowed money have a price. That price is the interest rate. It’s the percentage of the amount borrowed that is paid in addition to the actual amount of money borrowed.
Back to the “fixed-rate” part… it refers to the interest rate, or price of the loan, being fixed. The percentage you’re charged for the borrowed money won’t change, if you select a fixed-rate mortgage. That can be good or bad, which we won’t get into in this article, but it makes things simpler for most people who don’t want to learn all about finance (however, it would be wise to learn as much as possible in this author’s opinion).
In a nutshell, a fixed-rate is good if interest rates (aka loan prices) go up after you lock in your rate. A fixed-rate is bad if interest rates go down after.
There are several different ways to price loans out there in addition to the fixed-rate price, which will have a variable interest rate or some combination of fixed-for-a-while and variable-for-a-while interest rates.
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