The Pros and Cons of Fixed-Rate Loans

Buying & Selling a Home

The Pros and Cons of Fixed-Rate Loans

Consider these pluses and minuses before jumping into a loan you'll be paying for the next 15 to 30 years.

If you're considering buying a home, you'll also need to take into consideration the type of mortgage loan that will work best for you and your finances. Here are three common loan types including the pros and cons for each:

Long-Term Mortgages

The most common mortgage is the 30-year fixed-rate loan.

Pros. Predictability is the big plus. You know exactly how much interest you will pay over the term of the loan. Total monthly payment of principal and interest is fixed, and in early years it consists primarily of tax-deductible interest.

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Mortgages without prepayment penalties permit you to shorten the term of the loan at will -- and lower ultimate interest cost -- by making periodic payments against principal.

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Cons. Stability comes at a price. Interest rates on fixed-rate loans are usually higher than starting rates on adjustable-rate loans. If you choose a low-down-payment loan, you may have to pay for mortgage insurance -- an added monthly expense that protects the lender from risk of loss.


15-Year, Fixed-Rate, Fixed-Payment Mortgage

Pros. Principal balance is reduced relatively rapidly compared to longer-term loans. The 15-year fixed-rate loan permits you to own your home debt-free in half the time, and for less than half the total interest cost, of a 30-year fixed-rate loan. It offers some individuals a useful financial planning tool. Interest rates may be lower than those offered on 30-year fixed-rate loans.

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Cons. Higher monthly payments make these loans more difficult to qualify for than longer-term mortgages. A 15-year mortgage reduces the number of homes you can afford to buy and locks you into making monthly payments roughly 15% to 30% higher than you'd make with a comparable 30-year loan.

Biweekly Fixed-Rate Mortgage

Pros. The biweekly payment schedule of this kind of loan speeds up amortization, reduces total interest costs and shortens the loan term -- usually from 30 years to between 18 and 22 years. You make 26 biweekly payments -- which amounts to 13 annual payments -- instead of 12 monthly payments. Conversion to a 30-year fixed-rate loan is usually permitted. Payments are deducted automatically from your savings or checking accounts.

Cons. Private companies and lenders usually charge for this service. Registration fees and biweekly debit charges can make this a costly way to shorten the life of a loan and lower interest expense. The same objectives can be accomplished more flexibly with a 30-year mortgage by making an extra payment or two each year or by applying an additional sum to principal repayment when you make a monthly payment. As with other kinds of rapid-payoff mortgages, you trade total interest-cost reductions for reduced tax-shelter benefits.