Press "Enter" to skip to content

Solved: Which Type of Mortgage Has a Payment That Remains the Same Until It Is Paid Off?

Answer: Fixed-Rate Mortgage

If you want to buy a real estate property, commercial or residential, whose interest rate would remain the same through the loan repayment period, a fixed-rate mortgage is what you should get. The lender and the borrower agree on a fixed rate for this type of mortgage.

Only some borrowers qualify for a fixed-rate mortgage. Lenders are cautious about who they are extending this type of mortgage to because of uncertainty in the long run. To be on the safe side, lenders opt to extend a fixed-rate mortgage only to low-risk borrowers. This locks out high-risk borrowers.

Low-risk borrower

There are many things that a lender will use to classify you as a low risks borrower. One of these things is a steady income stream. If you have a steady income stream, you are in a position to repay your mortgage loan.

Not every income stream is considered steady. Lenders have different criteria to determine if a borrower’s income is sustainable enough in the long run. An income does not necessarily mean you would qualify as a low-risk borrower. The predictability of your earning in the life of loan repayment would measure your income stability.

High-risk borrower

This would be someone with no income stream or a good credit score. If you had defaulted on other loans before and earned a bad credit score, you are a high-risk borrower to lenders.

In other cases, you would be a high-risk borrower just because you do not have any credit score. Your ability to service a loan without defaulting any payment is in doubt.

Benefits of Fixed-Rate Mortgage

1. Facilitates good planning of your finances

Since you know how much money you will pay and when to pay it, you can manage your income strategically. If you earn enough, you can even set aside some of your disposable income to use in future mortgage loan payments.

2. Protection from rising interest rates

Economic stability is not always promised. At times, inflation might change abruptly, and interest rises may soar. Those repaying loans would cough more to service these high-interest rates. However, since the interest rate of a fixed-rate mortgage is constant n the loan life, you do not have to worry about changes in interest rates in the market.

3. Ideal for long-term loans

If the long term, there is much that can change. This could disadvantage you as a borrower regarding the total amount you would repay. However, since this type of mortgage has a fixed rate, you are cushioned against unprecedented market changes making it ideal.

4. Gives you peace of mind

Let’s be honest; it would be disturbing to be serving a loan you are not certain of its interest rates. To eliminate the mental distress of a mortgage loan, get yourself a fixed-rate mortgage. This would give you some control of the loan repayment process.

Drawbacks of Fixed-Rate Mortgage

1. Hard to qualify

The core drawback of a fixed-rate mortgage is qualifying for one. Lenders do so many background checks before recognizing you as a low-risk borrower. Since the process may solely depend on them, you might be disappointed to find you are not a low-risk borrower as you thought.

Related Articles:

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *