The Pros and Cons of Fixed-Rate Loans

If you're planning on getting into a fixed rate personal loan this year, it is imperative to consider the pros and cons of your options before signing any dotted line. Remember that fixed rates loans are usually lengthy. They may last 15, 25 or even 30 years. That's a long time of repayment so it's best to know exactly what you're getting into before jumping on board.If you want to buy a home this year, for example, here are three options you can take into consideration:

30 Year Fixed Rate Mortgages
Of the mortgage loan options in the market today, the most common is the 30-year fixed rate option. The main advantage of this type of loan is that you know exactly how much the interest rate is. This means that you can borrow money for long term without worry about the interest rate changing over the years. Compared to 15-year old mortgages, the monthly payments are lower, therefore more manageable. When tax time comes around, it also means that you can deduct a higher amount reducing your tax liabilities.

On the downside, 30-year fixed rate mortgages end up with a much higher interest rate in the long run. Interest rates are also higher than options that only last 15 years. More importantly, you have to remember that this type of mortgage builds equity very slowly especially since the first few years of your payments go mainly to cover the interest rate instead of the principal amount.

15 Year Fixed Rate Mortgages
Compared to 30-year mortgages, this option allows you to build equity much faster since repayment term is shorter. Because the term is also shorter, the overall interest rate is significantly lower. But just like the previous option, the interest rate is fixed throughout the entire term. There are going to be no surprises until the loan is paid off.

On the downside, 15-year fixed rate mortgages typically require higher monthly payments especially if you're planning to borrow a large amount. Another disadvantage is the limited house options than what you can afford if you opted for a 30-year fixed rate mortgage.

Biweekly Fixed Rate Mortgages
Another option that's also popular among homebuyers is the biweekly fixed rate mortgages. For this type of loan, you get to enjoy advantages such as reduced interest rate, short loan term and faster amortization schedule. Rather than pay for the loan for 30 years, this type of loan set-up reduces the term to 18 or 22 years. This also means that you'll be making 26 biweekly payments or 13 payments every year. Making it even easier for homebuyers is the option to automatically deduct the repayment from your savings or checking accounts.

But just like the other options, biweekly mortgages have its share of disadvantages. While the loan term may have been shortened, you'll have to cover for registration fees and charges associated with biweekly automatic debit deduction from your savings or checking accounts. What happens with this option basically is that you shorten the repayment term thereby reducing the overall interest cost but in exchange you also reduce your tax-shelter benefits.