Monday, August 31, 2015

Don't Jump the Gun Locking Into a Fixed-Rate Mortgage

We have all heard that mortgage rates are likely about as low as they can go, and you may think it is a sure bet to lock into a fixed rate. However, homeowners should be focused less on rates and more on the bigger issues. Such as affordability, eligibility and most importantly, maintaining good credit.

First things first. Many people do not understand the difference between a fixed and a variable mortgage. A fixed mortgage is locked in for a set term at a set rate, and offers no flexibility. A variable mortgage fluctuates with the market index rate, which can be beneficial in the long run as low rates leave room for you to potentially get ahead on payments. There are pros and cons to both fixed and variable.

On the fixed side. You now what you're paying for the next three, four, or five years, and you don't have to worry about the ups and downs of rates. At the same time, being locked in means just that: a hefty penalty that can wipe out any potential equity, defeating the purpose of a low rate in the first place.

On the variable side. There is a risk. Rates can go up, increasing the amount you are required to pay and reducing how much of your payment is actually going toward paying off your mortgage, since you'll be paying more towards the interest. At the same time, the likelihood of rates skyrocketing in the short term and making your payments unmanageable is extremely low.

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