More than six million homes are sold in the US each year. And most people who are buying these properties are financing them with a mortgage loan.
Although it’d be nice to pay cash for a home, very few people have the level of income needed to save up more than $300,000 for the average home. Most people are struggling to come up with the traditional 20% down payment on homes, as well.
Luckily, there are many mortgage options available today to help different types of borrowers, yet still offer a fixed rate. What is a fixed rate mortgage? It’s the financial help you need since the interest rate will never change on you.
Wondering why fixed rate mortgages are so popular, and why they’re so beneficial to get? Keep reading below for answers to all your mortgage rate questions.
How do Mortgages Work?
When buying a home, most people are looking for long-term loan options with low monthly payments. They aren’t concerned with paying off the loan soon, as they’d rather keep more of their money in their own pocket each month.
As such, the 30-year mortgage is the most common. When you get a mortgage, the purchase price, minus the down payment, is spread out into monthly payments spanning 30 years.
The loan is also amortized, which means that the total amount of interest is also factored into the loan repayments, with more interest being paid during the first part of the loan, as opposed to the latter.
When you buy a house, you’ll pay the down payment, which can range anywhere from 3.5% to 20%, depending on your loan program and specific lender.
Once the loan is closed, you’ll begin making your monthly payments within the next one or two months. In the beginning, most of your monthly payment is paying interest, with very little going towards the actual debt.
Either way, your mortgage payments stay the same every month, for the entirety of the loan period. Unless you have an adjustable-rate mortgage (ARM).
With an ARM, your interest rate fluctuates with the market. It can rise and fall many times over the life of your loan, and your monthly payment will adjust accordingly. However, your rate is typically locked for a fixed period, which can last a few years, depending on the lender.
What Is a Fixed Rate Mortgage?
If you don’t want your monthly payments to adjust, based on your current interest rate, then choose a fixed-rate mortgage. With a fixed-rate mortgage, you lock in your interest rate at the time of purchase. This rate stays the same during your entire mortgage repayment period, usually 30 years.
So even if the market goes crazy and interest rates are rising, yours is locked in. Your monthly payments will also never change, helping you to maintain a consistent budget.
The downfall of a fixed-rate mortgage is that if interest rates drop around the country, yours stays the same. The only way to capitalize on a lower interest rate is to refinance your mortgage.
But refinancing means paying closing costs again and resetting your mortgage payback period.
If you buy a house with a fixed-rate mortgage under 5%, you probably don’t need to refinance for a lower rate, unless they hit 2% and you still have many years left on your loan.
Who Is a Fixed-Rate Mortgage Right For?
If you’re buying your forever home, then a fixed-rate mortgage is probably the best option for you. In general, you can expect interest rates to rise over time.
So locking in a low rate today can help you save money in the long term. Over the course of 30 years, while you’ll still pay a lot of interest, you’ll benefit from consistent monthly payments and no surprise rate hikes.
If you’re not planning on staying in a particular house forever, it might make sense to consider another option.
Variable Rate Mortgages
The basic, non-fixed mortgage option is the variable rate mortgage. These never have a fixed interest rate and are always at the mercy of the market.
While some seasons, the interest rate might work in your favor, other seasons might require you to pay much more, which adjusts your monthly payment.
However, if you think interest rates are likely to drop in the future, but you can’t wait that long to buy a house then a variable rate might work for you.
ARMs have fixed rates for a period of time, usually lasting a few years, before transitioning into a variable rate mortgage. Thanks to the fixed-interest period, many homeowners who know they will either refinance or move out within a few years stick with the ARM.
Do you think a refinance is possible in your future? You can learn when from Modern Lending, to ensure you are making the best decision at the best time.
With an ARM, you might get a lower rate upfront compared to a fixed-rate mortgage, which can help you save money if you know you’re getting out of the loan soon.
For those looking for the lowest monthly payments, then a balloon loan, or interest-only loan might work in your favor. Interest-only means only paying off your interest each month, not the principal. You won’t be required to pay back any principal until a specific date.
Many people use these loans if they know they will sell the home at a certain point and can pay the principal back in full at that time.
Getting a Fixed Rate Mortgage
Almost every mortgage lender offers fixed-rate mortgages. Because they are the most popular mortgage loan option, they have to offer them.
Fixed-rate mortgage companies are often corporate banks, local banks or credit unions, or specific mortgage lenders. They’ll make the process of applying for a mortgage seamless and straightforward, so you can get into a home regardless of what situation you are in.
The Best Mortgage for You
So what is a fixed rate mortgage? It’s the most popular mortgage loan option, as the interest rate stays the same during the life of the loan, which is most commonly 30 years.
The consistency is preferred by most borrowers you think they might stay in the house long-term, and don’t want to risk paying a higher rate when the market shifts.
Looking for more home buying tips like this? Head over to our blog now to keep reading.