A fixed-rate mortgage is a mortgage that has a fixed interest rate for the entire term of the loan. The distinguishing factor of a fixed-rate mortgage is that the interest rate over every time period of the mortgage is known at the time the mortgage is originated. The benefit of a fixed-rate mortgage is that the homeowner will not have to contend with varying loan payment amounts that fluctuate with interest rate movements.
Main Benefits of the Fixed rate Mortgage
- Monthly Mortgage payment (Principal + Interest) does not change
Drawbacks of the Fixed Rate Mortgage
- Generally, the interest rate on an adjustable-rate mortgage is lower.
A Fixed Rate Mortgages May Be a Good Choice if you
- Plan to live in the same house for many years/
- Think interest rates will be rising in the next few years and you want to stay at the current rate .
- Prefer the stability of a fix payment that does not change over the life of the loan.
Fixed Rate Mortgage Term
A mortgage’s term is the number of years you have to pay it. You have two main choices: a 30-year term, a 15-year term or a 20-year term.
30 Year Term Fixed Rate Mortgage:
The 30-year conventional fixed-rate mortgage has long been popular due to its fixed interest rate and lower monthly payments. However, since the interest payments are spread out over 30 years, you'll pay more interest over the life of the loan than you would on a shorter-term mortgage.
15 or 20 Year Term Fixed Rate Mortgage
With a short loan term and lower interest rate, a 15- or 20-year fixed-rate mortgage can help you pay off your home faster and build equity more quickly, although your monthly payments will be higher than with a 30-year loan. The 15- and 20-year fixed-rate mortgages are especially popular for refinancing.
The Difference Between Fixed Rate Mortgage and an Adjustable Mortgage
The difference between a fixed rate and an adjustable rate mortgage is that, for fixed rates the interest rate is set when you take out the loan and will not change. With an adjustable rate mortgage, the interest rate may go up or down.
Many ARMs will start at a lower interest rate than fixed rate mortgages. This initial rate may stay the same for months, one year, or a few years. When this introductory period is over, your interest rate will change and the amount of your payment is likely to go up. Part of the interest rate you pay will be tied to a broader measure of interest rates, called an index. Your payment goes up when this index of interest rates increases. When interest rates decline, sometimes your payment may go down, but that is not true for all ARMs. Some ARMs set a cap on how high your interest rate can go. Some ARMs also limit how low your interest rate can go.
Qualifications for a Fixed Rate Mortgage Loan
- Loan amount - The loan amount for a conforming mortgage is generally limited to $453,100 for a single-family home, though limits may be higher in regions where home prices are higher. Jumbo loans allow you to exceed the conforming loan limit to borrow for a higher-priced home.
- Credit history - Conventional loans are a good choice for borrowers with very good credit, which generally means a FICO score of 580 or higher. There are also established guidelines for income and other personal financial information.
- Down payment - Most conventional loans will require at least 5 percent (and optimally 20 percent or more) as a down payment. For loans with lower down-payment requirements, explore government-backed mortgages like VA loans and FHA loans or speak to your Mortgage Loan officer about other options that may be available.
Consider Your Options
Conventional fixed-rate mortgages may be a popular option, but they're not the only one. Our experienced professionals here at Signature Mortgage will explore all of your options to assist you in understanding what Mortgage meets your specific needs.