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What are the benefits of using fixed-rate mortgage in purchasing or refinancing your home? If you are in an adjustable-rate loan, should you consider refinancing and getting out of it while you still can or buckling down and budgeting your money before interest rates get too high and home values drop?

There’s no simple answer to that question, since so much depends on your specific home, loan, and personal financial situation. But you’ll also find that, depending on your state or county, a different type of mortgage is appropriate for you. Sound confusing? It shouldn’t be: simply put, areas with home values that are increasing (and where interest rates are low) often choose to have adjustable-rate mortgages on their properties. On the flip side, many U.S. homeowners find a fixed-rate loan to be safer and less dependent on market conditions. It also provides people with security and a sense of self-confidence in their ability to meet financial obligations.

While an adjustable-rate mortgage (ARM) might work for you if you fully understand the terms and conditions, you have to work on budgeting your money. By their nature, in an ARM, interest rate will increase or decrease – and you should be prepared. In recent years, the interest rate has risen steadily, causing many homeowners with adjustable-rate loans to see rising costs in month-to-month payments.

An ARM is a gamble – you’re gambling that the interest rate will decrease and home values will increase. If you happen to be wrong, you could face an insurmountable monthly payment and a decreased home value.

On the other hand, you could look into a fixed-interest mortgage. As you look into the best home loan option, here are three advantages of fixed-rate mortgages to consider:

• Decreased risk. Your month-to-month mortgage payments are fixed. Even if the current interest rate increases, yours will stay put, which is an essential point of security for many homeowners. This is one reason why fixed-rate mortgages are popular, particularly with first-time home buyers.
• Secure long-term planning. Since your monthly mortgage payments won’t change, you have the security of planning out your payments throughout the life of the loan. You can carefully plan for things like property taxes and insurance, and it also allows you to be financially responsible in planning out your family’s future.
• Budgeting your money. For the most part, we can’t predict the ebb and flow of interest rates. Inflation may cause interest rates to rise, which would cause you a great deal of trouble with an adjustable-rate loan. With your fixed-rate loan, though, you can ride out the storm at ease. Your mortgage rates will stay the same, even if your taxes and insurance costs rise.

Fixed-rate mortgages have been a secure way for home owners to purchase homes for decades. Over the years, loan-to-value ratios have fluctuated and interest rates have moved up and down, but the security that a fixed-rate mortgage offers has never lost its appeal to homeowners throughout the U.S.

Fixed-rate mortgages may have a timeline between 10-50 years, but a 30 year amortization period is most common. People often choose a 30 year loan, because it often gives you a reasonable monthly payment to shell out. Rising home costs, though, have increased the number of 40- and 50-year loans being accepted. While that may be a good move to make the month-to-month mortgage payments reasonable, it does increase the amount of interest on the loan by stretching those interest payments over a much longer period of time – with a 50-year loan, almost twice the amount!

Understanding closing costs. Also known as settlement costs, closing costs are fees and expenses over and above the price of the property, incurred by the buyer and/or the seller in the property ownership transfer.

During the early years of a fixed-interest mortgage loan, much of your monthly payment goes toward eliminating the interest. As the loan progresses, though, that will change: slowly but surely, most of your payments will go towards that principal, such that by the end of your loan almost all of your money will go towards principal payments.

This type of fixed-interest payment plan means that it will be harder to sell your home during the first few years. Very little of the principal will have been paid off, so the loan will still be high. If the house did not appreciate in value, the financial situation gets difficult. However, if home values are increasing, then it will be a significantly smaller problem that so much of the principal has yet to be paid.

As the homeowner, you have some choices with this, too: making a larger monthly payment and directing more of it towards budgeting your money will decrease your principal loan balance faster, and decrease the amount of interest that’s left over. Say, for example, that you paid half of your monthly mortgage every two weeks; that would pay off your mortgage about 5.25 years faster than scheduled. Paying one extra payment per year would reduce the amortization period by 5.25 years, as well. Options like these aren’t requirements, but they do shorten your payment periods significantly.

Another factor to a mortgage loan is the “point” system. Points will decrease your interest rate if you pay an additional fee – about 1% of your loan for each point. Depending on your circumstances, it could be a good idea to invest in points, but you’ll want to calculate your overall savings before you start buying them. To recover the cost of those points, you’ll want to figure out your monthly savings with the lower interest rate versus the rate without points. Divide that number into your points to arrive at the number of months it will take you to break even. Beyond that, all of your savings are yours to keep.

To give an example of that, if you decide to pay for 2 points on a $300,000 loan (for an interest rate of 5% rather than 7%), your payment will be $1610.46. However, stuck with the 7% interest rate, you’re left with the payment of $1995.91. The difference between the two payments is $385.45.

Two points will cost $4,000. To recoup that investment, $4,000 divided by $385.45 equals almost 10.4 months. By your 11th month, not even one year of payment, you will begin to profit from paying those points with a personal budget planner.

Hopefully it’s become clear now that your choices involved in a fixed-interest rate mortgage loan can be extremely beneficial to your personal financial situation. There are many ways that you can decrease the term of the loan or the overall interest rates of the loan. With smart financial planning, you can be through that loan and into financial freedom quickly.

Further Reading on the Topic:

Personal Budget Planner

Budgeting Your Money

Home Budget

Now that you have heard wedding bells and experienced the joys of your wedding ceremony, it’s time to start thinking about how you’ll merge your finances. The budget management situation of a newlywed couple is not something to take lightly – the foundations you build right from the start will affect the entire relationship. Don’t simply think that “things will sort themselves out.” That’s the mindset of a financially troubled marriage.

Over 90% of couples admit to arguing over their budget management, and 34% cite it as a major problem in their marriage.1 Imagine not planning out who will handle your bills and organize your joint savings, let alone plan an overall budget for the family – and you might just cringe. Each spouse has their own interpretation of “important” expenses, and they’re going to spend accordingly without some joint agreements.

Coming up with those agreements, though, can be hard without the proper ways to track spending. Especially for young newlyweds in their late teens or early twenties, knowing what to do with taxes, savings, and 401k plans can be so confusing that many often revert to simply avoiding the subject altogether. Unfortunately, the theory of “if we ignore it, maybe it’ll work itself out” usually leads to more tension than satisfaction.

As if that weren’t enough, many newlyweds these days are thirty-somethings who are combining households and finances – a complicated issue by any measure. Whether you’re 19 or 35, then, there are several key factors and financial items that should be on any newlywed’s To Do list after the excitement of the wedding dies down.

1. Combining and Optimizing Insurances

Job One for any “financial marriage” is for both of you to change your insurance coverage. If both spouses have insurance coverage, it’s best to examine the different plans and costs to decide where the combination should occur. For instance, if the husband has insurance coverage that allows for free spousal coverage, you can set the wife up under that policy and start cutting your spending immediately.

If you can duplicate coverage, that’s good! Duplication ensures that should a medical emergency occur, your insurance policies should cover all of the important issues. If you are paying for insurance under one policy, but not the other, it may be a good idea to place the insurance coverage under the free policy and eliminate the charged one, if possible. Look for ways to lower your overall costs without losing coverage for both.

Mint’s Tip: A popular comparison site for health insurance is eHealthInsurance.com. They list many of the major insurers, and don’t require you to input your personal information before seeing the plan specifics such as monthly premium, deductible, and coinsurance percentage.

Aside from just medical insurance coverage, you’ll also need to combine homeowners insurance, renters insurance, auto insurance, and possibly life insurance. Make sure that you aren’t paying for the same coverage twice, and combine everything when and where possible. Your overall costs are cheaper when combined – for instance, auto insurance policies always offer multiple-driver and multiple-car discounts. Since most policies will require you to complete these changes within 30 days of your marriage, it’s a quick way to see financial savings immediately.

Keep in mind, as well, that your insurance coverage policies need verification of the marriage in order to proceed. Don’t just wait around and count on filing the marriage certificate paperwork to get that document in time! Most offices take 4-6 weeks to process your certificate. Make it a point to go down to your local county recorder’s office and get a copy, so that you can set up your policies quickly and efficiently.

While you’re changing your insurance coverage policies, you’ll also need to change your beneficiaries should something go wrong. Most people allow their spouse to be their beneficiary for all bank accounts, savings accounts, retirement plans, and insurance policies – so you’ll have to make those decision, as well. Also, some employers require that you identify the person who would receive your final check should something happen to you. Make sure to identify that person as your spouse, as well.

2. Juggling the Tiny Details and Plan for the Unexpected

There are also other issues that should be addressed before you race off to the honeymoon. If one spouse will be changing his or her name, for example, that change should be filed with the social security administration. That spouse will be issued a new social security card and, with that information, can change driver’s licenses or IDs to reflect the change. Anyone who sends you mail – such as credit card companies, magazine companies, and even, where applicable, your alumni association – should be alerted, too.

Now that that’s all taken care of, you’ll need to upgrade your wills next. This step is particularly important, as an old will can cause a terrible knot of problems should something happen to you or your spouse. Don’t stall from addressing these concerns quickly – although planning for situations like these can be difficult, ignoring them will only compound the problem. Make sure your desires are made clear.

3. Figure Out Where You Both Stand Financially

Your next obvious step is one that’s hard to overlook: reviewing all credit cards and other debt obligations between you and your spouse. Many people have credit cards, while others have student loans, child support, and alimony. It’s a good idea to sit down and plan out a way that you and your spouse can pay off these debts. While a perfect solution would be to eliminate your debt prior to getting married so as not to burden your spouse with your own debt, this isn’t always a possibility. Therefore, it’s important for both parties to work on making their family and their marriage debt-free.

4. Budget Management For Your Future – Together

Beyond just paying off debts, though, you’ll want to review your financial goals for life. When do you both plan to retire? Do you own a home yet? If so, do you want to plan on moving into a larger home? If you don’t own a home yet, you’ll often want to draw up a timeline goal for buying one. How long will it take you to save up money for a down payment, and what can the two of you afford when it comes to a home purchase? Set goals together, as a couple, so that you both have a clear understanding of your desires, your goals, your milestones, and the means by which to accomplish them.

This last step brings us to a key point: a newlywed couple absolutely must develop a budget. It is essential that the two of you work out your income, your monthly expenses, and debt obligations. Once that’s been determined, you can make key decisions on how to save money, create an emergency fund, or invest in options for the future. Without a budget, you are going to experience a difficult time together!

With this budget in hand and your plan for the future set, your debt repayment plans laid out, and your key financial information changed over, as a couple you’re ready for a successfully and financially responsible marriage together. Stress levels will be lower and your foundation will be set for a strong marriage based on financial responsibility. Hopefully, all of this planning will ensure that money will never be what comes between you both!

Reference

1. Barbara Dafoe Whitehead, “Dan Quayle Was Right,” The Atlantic Monthly Magazine, April 1993, 47.

Further Reading on the Topic

Create a budget

Budget Management

Track Spending