Fixed-Rate Loan Programs
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You need a mortgage. But what type of mortgage do you need? It turns out, there are many types of mortgage, and it makes a big difference. Let’s take a look at one of the simplest and most straightforward types of mortgage: the fixed-rate loan. For most people, a fixed-rate loan is going to be the ideal type of loan. But there are also other options, which can be better under unique circumstances.
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What Is a Fixed Rate Loan?
When you get a mortgage (or refinance an existing mortgage), you get an interest rate. Usually expressed in annual terms, the interest rate is the amount that you are charged on the outstanding balance of the loan. Your interest rate depends on several things: the current federal interest rates, your credit score, and the lender that you’re working with. Interest rates are often somewhat negotiable, and during the purchase of a house, you can often pay a little more to reduce your interest rate.
Under a fixed-rate loan, your interest rate will never change. If you have a conventional, 30-year mortgage, your interest rate is going to remain the same throughout each of those 30 years. That also means that your mortgage payments are going to remain the same. You’ll have static mortgage payments throughout the life of the loan.
A fixed-rate loan is great because it’s consistent. You always know what you’re going to be paying, and you can rest assured that your payments aren’t going to change. But there are some downsides, too. If you only qualify for a high rate, you can get locked into that high rate — unless you refinance later on.
What Are the Types of Fixed Rate Loan?
The most common type of fixed-rate loan is a conventional, 30-year mortgage. However, there are other mortgages out there, such as 15-year mortgages. For cheaper properties, 15-year mortgages are often preferred. You can save a significant amount of interest by paying off a loan faster.
There are also fixed-rate interest-only loans. During an interest-only loan, you pay only the interest amount of your loan for some period, and you start paying down the principal later on. You have lower payments during the interest-only period, but higher payments later on, to compensate. Interest-only loans are more expensive, but they often allow home buyers to purchase homes that they otherwise wouldn’t qualify for.
What If Your Fixed Rate Interest Is Too High?
If your interest rates are too high, you can get priced out of the homes that you want. There are several things a homebuyer can do to reduce their interest rates:
- Pay for points.
- Improve their credit.
- Add a co-signer with better credit.
- Consider other lending products.
- Shop around with other lenders.
However, interest rates are significantly impacted by the economy and the market. There’s only so much that a borrower will be able to do if the environment currently supports higher interest rates.
What Are the Alternatives to a Fixed Rate Loan?
The alternative to a fixed-rate loan is a variable rate loan. Under a variable rate loan, the interest rates will shift based on the market; they aren’t guaranteed. Variable-rate mortgages often start out less expensive for the home buyer, letting them purchase a home higher in cost than they could qualify for under a fixed-rate loan. However, there’s always the potential that the rate could increase to an amount that makes paying the mortgage untenable.
While a fixed-rate loan is usually considered to be lower risk than a variable rate loan, there are times when a variable rate loan makes more sense. If loan rates are very low and expected to increase, fixed-rate loans are better. But if loan rates are presently high and expected to slide, a variable rate loan is usually better. Unfortunately, it’s not always possible to know whether rates will go up or down long-term.
Studies have shown that buyers with variable rate loans do end up paying less overall than buyers with fixed-rate loans. The issue is that a sudden spike in interest rate could make homeownership unaffordable. Buyers who are already well under their price point, however, could benefit from getting a variable rate loan.
Fixed-rate loan programs are the most common form of lending for mortgages. But they aren’t the only type of loan available. You can explore other lending options with the experts at Landmark Mortgage Capital.