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What are the Benefits of a Fixed Rate Mortgage?

July 14, 2022 By JMcHood

If there’s one type of mortgage that is the most popular, it’s the fixed-rate mortgage. Perhaps it’s because of its predictability or because it’s the loan most people know about. Either way, you need to decide if it’s the right choice for you.

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Learn the pros and cons of this type of mortgage to help you make your decision.

The Pros of the Fixed-Rate Mortgage

  • Predictability – This goes without saying. Your interest rate never changes. You know from day one how much you will owe in principal and interest. The only amount that may change is your escrow payment. Real estate taxes and homeowner’s insurance costs may change, which could alter your mortgage payment slightly.
  • Simple comparison shopping – If you shop around with different lenders (which we recommend), it’s easy to compare apples-to-apples. You look at the two interest rates for the same terms and see which one is higher. You don’t have any calculations to perform or other factors to consider.
  • No worrying – You don’t have to watch the market during the months leading up to your adjustment rate to predict what your interest rate will do. No matter what happens in the market, your fixed-rate stays the same.
  • A variety of terms – Fixed-rate mortgages come in a variety of terms compared to other mortgage options, such as the ARM. You may be able to choose between the 10, 15, 20, 25, and 30 year term. This allows you to play with the payments a little to determine which one suits your budget the best.

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The Cons of the Fixed-Rate Mortgage

  • Higher starting rate – The adjustable rate mortgage often has an introductory rate that is lower than the fixed-rate loan. In exchange for the predictability, you may pay more interest on your loan for a few years. But, you don’t have the worry of an increasing rate down the road.
  • Pressure when locking the rate – Locking in your interest rate for a purchase or refinance is stressful. You have to choose just the right time, but that can be impossible. You cannot predict if rates will go up or down within the next hour let alone the next few weeks. This could leave you with buyer’s remorse if you lock in a rate and then rates fall.
  • Must refinance to lower rate – If rates fall and your friends with ARMs start to enjoy lower rates, you’ll still be paying your higher fixed rate. The only way out of it is to refinance, which costs money and isn’t always in your best interest, depending on the situation.

Choosing the Right Program

The best way to determine if the fixed-rate mortgage is for you is to compare all of your options. Ask several lenders which loan programs you qualify to receive. Then you can figure out which one works best for you. Don’t look at just the interest rate, though. That is deceiving. Instead, look at the big picture.

Lay out the quotes from each lender and compare closing costs, interest rates, and closing fees. An easy way to do it is to look at the APR. This gives you the breakdown of the cost of the loan over its entirety including all costs. This way you’ll have a better idea of which one suits you the most.

Of course, only you know what you can afford and what you are comfortable with taking. For example, if you have a stable job with a known income, taking a fluctuating ARM might not be the end of the world. If, however, you have a less stable job or you work on commission, you might want the predictability that a fixed-rate mortgage offers.

Consider all of the pros and cons and all of your options before making your decision.

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What are the Major Factors Affecting Interest Rates?

November 27, 2020 By JMcHood

If there’s one factor about a mortgage that most people worry about, it’s the mortgage interest rate. This little factor affects not only your monthly payment, but also how much interest you pay over the life of the loan. It could mean the difference between an affordable and unaffordable mortgage.

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So what determines which interest rate a lender gives you? There are many factors that when all put together, like a puzzle, the lender uses to provide you with a quote.

Keep reading to see what you need to watch in order to get the lowest interest rate for your loan.

What’s Your Credit History?

The very first thing most lenders look at is your credit report and for good reason. It lets them know how financially responsible you are, or aren’t. They use your credit score and history as a measure of your likelihood to pay back the loan you want to borrow.

As a general rule, the higher your credit score, the lower your interest rate. The lower your credit score, the higher your interest rate. It’s all about risk. If you have a high credit score, you pose a lower risk to the lender. In exchange, they can charge you less interest because it’s pretty likely that you’ll pay your mortgage back in full and on time.

If, however, you have a low credit score, you are a higher risk to the lender. The chances aren’t as good that you will make your mortgage payments on time. You may even default on your loan. The lender will likely charge a higher interest rate in order to make more money while you do make payments, in the event that you do default.

How Much are you Investing?

Another factor in your risk level is the amount of money you invest in the home. In other words, how much are you putting down? The more you invest, the more skin you have in the game. In other words, you have more of a vested interest to make your payments on time. If you don’t, you stand to lose a large portion of your own money.

As a general rule, 20% is the key when it comes to getting the best mortgage interest rate, but it’s not always necessary. Just putting down more than the minimum required makes you look better in the lender’s eye. Because they don’t focus on one factor, but all of them together, you want as many positive factors as you can.

For example, combining a higher than minimum requirement down payment with a high credit score shows the lender you are a good risk. However, a high down payment with a lower credit score shows good faith effort in offsetting your risky factor – the lower credit score.

How Much are You Borrowing?

Large loans obviously are a much higher risk than small loans, but that doesn’t mean you’ll automatically get a lower rate with a smaller loan. In fact, if the loan is too small, the lender will charge a higher rate just to make sure they make some money on your loan.

If, however, you borrow more than the conforming loan limit, you may pay an elevated rate because as your loan amount increases, your risk increases too. This will depend on the lender and the other factors of your loan application. In general, though, average size loans under the $453,100 conforming limit, but higher than $100,000 provide the lowest interest rates.

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How Long are you Borrowing the Money?

Generally, the less time you keep the bank’s money, the less interest they will charge you. Specifically, a 30-year term usually has a higher interest rate than a 15-year term. The bank knows they will have their money back in 15 years, so they keep the interest rate down. They will have their money back sooner so they can lend to another borrower.

A 30-year term ties up the bank’s money for a much longer period. While they won’t charge monstrous rates, they will be higher than the 15-year term just because of the higher level of risk. You double the amount of time that you will take to pay the bank back their money.

What Type of Interest Rate do You Want?

Finally, you must determine the type of interest rate. You can choose between a fixed rate and adjustable rate. Looks may be deceiving when it comes to the adjustable rate, though, so be careful. The adjustable rate is often much lower than the fixed rate. The tradeoff, though, is that it will adjust after the introductory period ends.

For example, let’s say you take out a 3/1 ARM. The interest rate is 3.0%. This means for the first three years of the loan, the rate will be 3%; it will not change. After those three years, though, the rate can adjust annually. This is where the catch starts. You’ll pay the index rate plus a predetermined margin. There’s no way to know today what the index (chosen by the lender) will be in three years. Your rate could go up or down quite a bit and you won’t know until you are closer to the adjustment date.

A fixed rate, on the other hand, never changes. It remains the same for the entire term. Because of this predictability, the lender charges a slightly higher rate than the introductory rate of the ARM.

Lenders take all of the pieces of the puzzle and put them together to come up with the perfect interest rate for you. Chances are that if you ask three different lenders for a rate quote, you’ll get three different answers. Each lender has their own threshold for risk and their own requirements. They will use those requirements to determine the right mortgage interest rate for you. The best thing you can do is shop around. If you apply with different lenders within a 30-day window, your credit doesn’t get hit for more than one inquiry. The credit bureaus recognize the need to talk with different lenders and get the interest rate that is most affordable for you.

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How to Use Mortgage Comparison Sites

January 6, 2020 By JMcHood

The internet makes everything easier, right? You can buy just about anything from the comfort of your own home. You can also do your research or ‘window shop’ before you head out. Many people do this with cars or appliances. But what about mortgages, can the internet help you compare loans?

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You can with mortgage comparison sites. These helpful sites give you an idea of what to look for in a loan before you ever talk to someone. Keep reading to learn how they work.

The Required Information

A quick search online will turn up hundreds of mortgage comparison sites. Each one works a little differently. The idea, however, is to provide you with quotes from several lenders that help you choose the right loan for you.

Some sites require you to disclose your personal identifying information. This way they can contact you and talk with you directly about your loan needs. Other sites, however, keep everything anonymous. You just enter basic information such as:

  • Your estimated credit score or credit rating
  • The type of transaction (purchase or refinance)
  • The down payment range
  • The state the property is in
  • The type of property

With this information, mortgage comparison sites can give you links or information to mortgage companies that have programs that match your criteria.

Other companies require all information including the actual sales price, real estate tax amount, and homeowner’s insurance payment. They provide the same results, though, links or referrals to lenders that may offer a program that suits your needs.

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Comparing the Offers

Once you have several offers – typically three to five, you should compare them. This could get tricky, though. Don’t just compare interest rates or just compare closing fees. You have to look at the big picture.

Look at what the loan costs over the entire lifetime. For example, a loan with a 4% interest rate sounds a lot better than a loan with a 5% interest rate, right? But what if that 4% rate came with double the closing costs? You may want that 5% interest rate after all.

The loan that works for you should be the one that costs you the least amount over the entire term. Think about how long you’ll stay in the home. If you take out a 30-year term, but will only stay in the home for 3 years, it doesn’t make sense to pay higher closing costs just to get a lower interest rate. You won’t be in the home long enough to enjoy the lower rate.

If, however, this is your home until you can’t live there any longer, keeping the interest rate as low as possible may be a good choice. Calculate how much you would save in interest with the lower interest rate over the loan’s term. If it exceeds the extra closing costs you’d pay for the lower rate, then it’s worth taking the lower interest rate loan.

Mortgage Comparison Sites Have Reviews

There’s a lot that goes into a mortgage that has nothing to do with the numbers. Your house is probably one of the largest investments you’ll make in your lifetime. You want to work with a company that is customer friendly and accommodating.

Use the reviews on the mortgage comparison sites to your benefit. Of course, read through as many as you can, not just one or two as some people have skewed opinions. But knowing what others have to say can help you make a decision. If one company is hard to get a hold of on the phone and you prefer phone contact, check other lenders. Or if a lender has a reputation of selling loans often and you want to remain with one lender, look elsewhere.

The mortgage comparison sites help you find the best deal as well as the right mortgage company for you. Take your time when choosing your mortgage company. Look at everything that the company is about as well as the terms of the mortgage they offer. Make your decision only after comparing it to at least two or more other loans so that you know you’ve got the best option for you.

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IMPORTANT MORTGAGE DISCLOSURES:

When inquiring about a mortgage on this site, this is not a mortgage application. Upon the completion of your inquiry, we will work hard to match you with a lender who may assist you with a mortgage application and provide mortgage product eligibility requirements for your individual situation.

Any mortgage product that a lender may offer you will carry fees or costs including closing costs, origination points, and/or refinancing fees. In many instances, fees or costs can amount to several thousand dollars and can be due upon the origination of the mortgage credit product.

When applying for a mortgage credit product, lenders will commonly require you to provide a valid social security number and submit to a credit check . Consumers who do not have the minimum acceptable credit required by the lender are unlikely to be approved for mortgage refinancing.

Minimum credit ratings may vary according to lender and mortgage product. In the event that you do not qualify for a credit rating based on the required minimum credit rating, a lender may or may not introduce you to a credit counseling service or credit improvement company who may or may not be able to assist you with improving your credit for a fee.

Copyright © Mortgage.info is not a government agency or a lender. Not affiliated with HUD, FHA, VA, FNMA or GNMA. We work hard to match you with local lenders for the mortgage you inquire about. This is not an offer to lend and we are not affiliated with your current mortgage servicer.

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