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The Future of Fixed-Rate Home Loans

Fri, 11/09/2012 - 4:26pm | by Shannen Doherty

Why will Fixed-rate Home Loans Fall out of Favor with Increases in Interest Rates

Home loans are a common standard. Home loans are given when you are trying to buy a home. There are many different types of home loans you can opt to utilize. One such type is known as fixed-rate home loans and it seems that it may just fall out of favor when interest rates increase.

The Two Principle Home Loans

When it comes to home loans, there are two main categories; adjustable-rate home loans and fixed rate home loans. Both are different and have preferences over one another. There really is no such thing as the best home loan because both types can be favored but under different circumstances.

  • Fixed-rate Home Loans – This type of home loan is exactly what it sounds like. Regardless of the period of the home loan, the interest rate will never change. It does not matter if it is high or low because once set, the interest rate will stay the same until you pay off the home loan. In essence, with a fixed-rate home loan, you know how much you will be paying over the period of your home loan.
  • Adjustable-rate Home Loans – The name of the home loan really does explain what type of home loan it is. When it comes to adjustable-rate home loans, the interest rate is usually fixed for a short initial period. After that period is over, the interest rate changes on a monthly or annual basis. The changes correspond with the market index at the time of change.

In America, adjustable-rate home loans are the most popular form of home loan. However, with sizable decreases in interest rates, people have started to prefer fixed-rate home loans to adjustable variants.

Fixed-rate Home Loans

When it comes to fixed-rate home loans, there are many advantages and disadvantages. The biggest disadvantage of fixed-rate home loans is that you could be paying a lot more money, even when the market index was low.

Once the after-effects of the 2008 recession started to subside and market conditions improved, interest rates dropped. Many people took this as a positive sign and decided to refinance their homes on fixed-rate home loans.

They feared that if the market climbed again, they would not be able to afford the interest rates. They decided to stick to fixed-rate home loans because they would be paying less, even if the market climbed. Fixed-rate home loans became so favorable with borrowers that only a few people had adjustable-rate home loans. These people were usually those who could not qualify for refinancing

Interest Rates

Interest rates are essentially the extra amount of money you pay every year to a lender. If you have a 30-year fixed-rate home loan of $200,000, on interest of 3.5%, you will essentially pay $7000 extra every to the lender every year. After 30 years, you would have paid the bank a total of $410,000.

The problem with interest rates is that they never stay the same. Depending on the condition of the market, interest rates could go up or down. If real estate is booming, chances are that home loan interest rates will climb. However, if the real estate market is deteriorating, interest rates on home loans will drop in order to attract new buyers.

Why Fixed-rate Home Loans will Fall out of Favor with Increases in Interest Rates

Due to the low interest rates currently being offered all around the world, most people are buying houses or refinancing their homes. This leads to an increase in market value and hence the interest rates on home loans. Open Door Loan is a place where you can find instant loans.

With the climbing interest rates, it may not be wise to prefer fixed-rate home loans to adjustable-rate variants. Progressively less people are applying for fixed-rate home loans. They are falling out of favor because of increases in interest rates – as simple a fact as any.

As market conditions deteriorated, more people applied for fixed-rate home loans in hopes that they would not have to pay more interest ever again. However, with the increasing real estate market, interest rates are climbing. In response, more people are preferring adjustable-rate home loans in hopes that interest rates will go down again.

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