Fixed Rate Mortgage Advice
Choosing the right mortgage with the best terms can be a challenge. Research and the proper preparation can help to make the job easier and the whole loan process run more smoothly. Fixed rate mortgages are the top choice for those looking to stay in their new home for many years, since they provide a stable interest rate and payment for the life of the loan.
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Preparation
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Create an accurate budget to determine how much you can truly afford for a monthly payment. Lenders only count set monthly payments like mortgage and installment loans, and the minimum payment on credit cards. Monthly expenses such as transportation, childcare, utilities, car insurance, and additional credit card payments are not figured in. While you may qualify for a certain loan amount, that amount may be more than you can afford after figuring in your other monthly costs.
Correct credit history information and low balances on credit cards can help with the approval process. Incorrect negative items can make you a higher risk and cause you to pay a higher rate. High balances on credit cards result in higher minimum payments, which can affect the loan amount you qualify for and can lower your score.
Downpayment
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FHA loans require a minimum downpayment of 3.5 percent, while conventional loans require at least 5 to 10 percent down, depending on your credit and your lender. The downpayment amount to shoot for is 20 percent, since lenders use that benchmark. Conventional loans require a monthly mortgage insurance fee for those who put less than 20 percent down.
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Rate Quotes
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Pay attention to the small print when looking at competing rates. Most of the rates advertised on the Internet and in the newspaper rely on a borrower having a good credit score and 20 percent down. These posted rates also can include points, which affect the actual interest rate paid on the loan. A point is equal to one percent of the loan amount, paid at closing. This upfront payment buys the interest rate down by around 0.25 percent, according to Bankrate.com, though this percentage can vary with market conditions. The money for these points will show up on any estimate of closing costs as "discount points."
Discount Points
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Whether to pay points and how long of a loan term you should choose depends on your individual situation. Generally, the longer you stay in a home, the more time you have to "break even" on points -- compare the cost of the points against the monthly savings from the lower interest rate and determine how many months it will take to pay for that cost with interest savings. For example, if there is a monthly savings of $50 and the points cost $4,000, it will take about 80 months, or 6 1/2 years, to recoup the points.
Loan Term
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Lenders offer fixed rate loans in 10-, 15-, 20-, 25-, 30- and 40-year terms. The shorter the loan term, the higher the payments, but the lower the amount of interest paid over the life of the loan. A 15-year mortgage requires the loan amount to be paid off in 180 months instead of the 360 months of a 30-year loan, resulting in a higher principal payment. Yet, you save 15 years' worth of interest payments. In addition, lenders charge lower interest rates on shorter term loans.
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