What Is A Fixed Rate Mortgage?
It is a mortgage that has an interest rate that remains the same for the life of the loan. The amount you pay per month will remain the same for the entire term, or length of the loan. The only fluctuations are homeowners’ insurance, property taxes and homeowners’ association dues, if any. The most common term is 30 years but 20, 15 and 10 are also available.
Reasons For Choosing a Fixed Rate Mortgage
Most homeowners choose a fixed rate mortgage. It gives homeowners piece of mind knowing how much they will owe each month.
Reasons To Not Choose a Fixed Rate Mortgage
- The criteria for qualifying for them can be more stringent. You will need an understanding of your credit score and DTI (debt to income ratio).
- Interest rates are usually higher than an adjustable-rate mortgage.
- If interest rates fall below your current rate, you will not benefit unless you refinance your loan.
- If you’re not planning to stay in the home for a long time, a fixed rate might not be the best option.
Types of Fixed-Rate Mortgages
- Conventional – they tend to have more strict requirements to be approved, like a 620+ credit score and a DTI no higher than 43%.
- Government Loans (FHA, VA, USDA) – have less strict requirements than conventional loans. FHA loans are the most widely available. VA loans are reserved for military personnel, veterans, and eligible family members. USDA loans are usually for homes in rural areas.
- Conforming – these follow requirements of the Federal Housing Finance Agency (FHFA) like loan limits, that allow it to be sold in the secondary market. This allows loans to be bought and sold which helps keep money flowing through the mortgage market.
- Non-conforming – these do not meet FHFA requirements. This includes jumbo loans and commercial properties. Rates tend to be higher and have stricter requirements.
- Amortizing – most fixed-rate mortgages are amortized. It means that your monthly payments go toward both principal and interest charges.
- Non-amortizing – less common but can sometimes have lower monthly payments that only cover the interest for a period of time. This could turn into a unexpected balloon payment.
So, depending how long you plan to stay in the home, your financial history, credit score and DTI can give you a clear picture of what type of loan is best for you.
