| Making The Choice Between A Fixed Rate Or Discounted Rate Mortgage. |
| Articles - Mortgage |
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What is a fixed rate mortgage?
What is a fixed rate mortgage? A Fixed Rate Mortgage is a type of mortgage where the interest rate you pay is fixed at a predefined level for a predefined period of time. For example, your interest rate may be fixed at 4.7% for 5 years, or 3.95% for 1 year. The level of fixed rate available, and the period of fixed rate depends on the specific availability of mortgage deals at the time you are looking. Fixed rate mortgage deals in general are usually only available for a limited amount of time or a limited portion of funds; once these funds have been allocated to people, the fixed rate deal is usually withdrawn. What is a discounted rate mortgage? A discounted rate mortgage is a type of variable rate mortgage which features an initial interest rate which is set at a discounted margin below the lenders standard variable rate, for a predefined period of time. A basic overview of the main benefits: The primary benefit of a Fixed Rate Mortgage over a Discounted Rate Mortgage is that you know at the outset what your interest pay rate and monthly payments will be for a set period of time. Knowing what you have to pay each month on your mortgage is useful to help you budget effectively. The primary benefit of a Discounted Rate Mortgage is that your starting interest rate is lower than the standard variable rate offered by the lender, and is usually lower than an equivalent fixed rate mortgage option. How to decide between the two? Fixed Mortgages could cost more in comparison, but at least you know what you are going to pay and presumably that amount is affordable. However, if interest rates go down you may be left wishing that you had opted for a Discounted Variable Rate Mortgage product. Discounted Rate Mortgages are likely to start at a lower rate, and if rates stay the same or go down then you may save money vrs an equivalent Fixed Rate Mortgage. But if rates increase your monthly payment will increase and you may wish you had taken a Fixed Rate Mortgage. So how do you decide which is the best option for you? Well, you certainly cannot know which will be the most cost effective, as it is impossible to predict the future fluctuations of interest rates. So it more or less comes down to your attitude towards risk. If so, you may wish to gamble with interest rates and opt for a Discount Mortgage in the hope that rates will stay the same or go down. Remember, Fixed Mortgages are not so much about saving money, it is more about peace of mind. Of course you want to find the lowest Fixed Rate Mortgage if this is the option you wish to go for. Conclusion: If you are trying to decide between a Fixed or Discounted Rate Mortgage it ultimately comes down to whether you are comfortable with taking a risk with your finances, and whether you think interest rates are likely to rise or fall in the foreseeable future. If you do think that interest rates are likely to fall or at least stay the same, and you can afford to take the risk that they may in fact go up - then a Discounted Rate Mortgage may be for you. If you have to think twice about it, or have any discomfort taking a gamble with your mortgage - then you should really opt to fix. DISCLAIMER: This article is provided as information only and is not to be taken as financial advice. For more information on Fixed Mortgage products or Dsicount Mortgage products go to www.firstbuyermortgages.co.uk . |