A fixed mortgage rate is one that has the same interest rate and monthly payments throughout the term of the loan. The payment due is calculated to payoff the mortgage balance at the end of the term. Fixed rate mortgages are the most popular type of home loan accounting for some 75% of mortgaged houses. The most common fixed rate mortgage terms are 15 years and 30 years.
The greatest benefit to a fixed mortgage rate is knowing exactly what your mortgage interest and principal payments will be so that you can plan your budget accordingly. It offers more security to a home buyer. If you have a 30 year fixed mortgage rate at 7% interest you will only pay 7% interest for the entire 30 years of the loan even if the nations market rate raises to 8% or decreases to 6%.
If you plan to be in your house for a long period of time a fixed mortgage rate is the best way to go. Though you may have a higher interest rate than with an Adjustable Rate Mortgage (ARM) a fixed rate is more secure in the long run and allows you to know what your monthly bills will be. ARMs frequently offer lower rates initially but are subject to change, sometimes dramatically, throughout the life of the loan.
The three main benefits to a fixed rate mortgage are the decreased risk, secure long-term planning, and the ability to budget your money.
When getting a mortgage for your home you will have to pre-qualify for a loan before most realtors will even show you any houses. A lender will search your credit history and take that as well as your income into consideration and then give you a number of the maximum amount they will be willing to lend you. Be careful with this number. Just because a lender is willing to loan you that amount of money doesn’t mean you can comfortably live with those payments.
Mortgage tip number 1, do not over-borrow. Choose a home that you can afford and pay for while still having enough money to do some home improvements and go to the movies every once in awhile. In order to do this, review your budget. Consider the amount of any monthly loans that you currently have, maybe for cars or college. Then think about other monthly expenses childcare, gas, electric, phone bills, don’t forget the bills that sneak up on you such as insurance and taxes. Consider your personal expenses such as food, clothing, entertainment, travel etc. Finally, estimate what a new mortgage payment might be, how much can you afford with all of your other expenses? Don’t forget to set aside some money for savings and retirement. Once you have figured out how much you could comfortably afford each month you will be able to determine how much you can afford to pay for a house. When you know your budget stick to it!
When applying for a mortgage be aware that you will need to provide some paperwork. Have the information handy about your employment for at least the last two years as well as your paystubs, W2s, federal tax income returns, bank statements proving the amount that you currently have in the bank, as well as current balances on any debt that you might have incurred. This information won’t be necessary before looking for a house but you will need it when trying to get a mortgage. The lender will expect to see this information because they are risking a lot of money on your reliability.
There will be transaction fees, or closing costs, due at the time of signing the mortgage. When you come to the table to sign the papers and receive the keys to your new home you will be bringing a down payment for the house as well as closing costs for the lender. When you are researching different lenders most should have similar interest rates but something else you will want to ask about are the closing fees. These prices may vary from lender to lender so if you are getting the same interest rate between two reputable companies the closing costs may make your decision a little easier.
Don’t simply assume you will need to have a longer term loan in order to afford your payments. When researching mortgage rates inquire about 15 year as well as 20 year fixed rate mortgages. By having a shorter term you will save thousands of dollars of interest throughout the life of the loan. If you get the numbers and don’t think you can handle the shorter term loan go for a 30 year fixed mortgage and pay as much extra towards the principal each month as you can. This will help you gain equity in your home quickly and it will cut down on the length of the loan.
As a home owner it’s a good idea to keep an eye on mortgage rates. When the interest rates fall even just one half of a percentage point your monthly payment could be lowered. If you don’t watch the mortgage rates and they are falling you could be paying too much interest each month on your home. If interest rates have dropped then there is a good chance that you could save yourself some money each month if you refinance your mortgage.
People typically choose to refinance for a couple of reasons. First, they want to lower their existing interest rate on their existing loan and lower their monthly mortgage payment. Second, they want to use some of the money from the mortgage to do home improvements or combine and pay down other debts.
Before you jump on the refinancing bandwagon there are a few things that you should know. Even though the rates may look great, if they aren’t more than a full percentage point lower than your current interest rate it might not be very beneficial to refinance. Lenders charge transaction fees for refinancing a mortgage. These high fees eat into the savings of your lower mortgage rate. The lower the closing costs and transaction fees the better. You may want to pay these fees with cash out of pocket, or you could negotiate a higher interest rate for a lower transaction fee, or sometimes you are able to roll the fee into the principal due on the house. Many homeowners are not able to refinance because they don’t meet certain criteria including, but not limited to, their credit score and a build up of equity in the home.
While researching online be sure that you compare interest rates and terms of different lenders. If you are not getting better terms and conditions on the mortgage then refinancing is probably not the right choice. Compare transaction fees of lenders, the lower the fee the more savings for you. When you think you’ve found a lender that you’re interested in working with call them and talk with a representative. Be sure that everything you read online is true when you talk to them in person. Choose to work with a reputable lender who will be trustworthy.
