FIXED RATE MORTGAGE

Find Out if You Qualify

What is a Fixed Rate Mortgage?

A fixed-rate mortgage is a full amortizing mortgage loan. The interest rate on the note remains constant through term of the loan.  The payment amounts are fixed, and the duration of the loan is fixed.  The benefits of a fixed rate mortgage are the borrower has a consistent, single payment and can plan a budget based on the fixed monthly cost.

What do I need to Qualify?

Income:

Lenders like to see your monthly debts including the monthly cost of your new loan payments to be less than 45 percent of your gross monthly income. Documentation required are paystubs, w-2’s, 1099s and tax returns.

Employment:

Typically, lenders like to see 2 years employment history.

Credit Score:

A credit score of 720 FICO or higher is preferred and increases the probability that you will repay your loan on time. We can go as low as a 620 FICO to qualify for 30-year fixed loan. Traditionally, a higher credit score will give you a better interest rate then if you had a lower score. 

What is an example of a fixed rate mortgage?

The most common fixed rate mortgages are fixed rate mortgages. This a popular product because it gives predictability of the monthly payment. This allows for borrowers to plan and budget for the future. A fixed rate mortgage is the opposite of a variable rate mortgage like a 5/1 adjustable-rate mortgage.

 

What will a fixed rate mortgage protect you from?

The initial years of a mortgage are primarily interest payments. A fixed rate mortgage’s main advantage is that it protects borrowers from significant increases in monthly payments as interest rates rise.

Fixed Rate Mortgage

How can I get out of a fixed rate mortgage?

Typically, fixed rate mortgages come with a prepayment penalty. These periods are usually 2 to 3 years which start at the beginning of the loan term. As long as you have no prepayment penalty or you have exceeded the 2- or 3-year prepayment penalty term, then you can refinance your mortgage into a new loan without penalty.

 

What are disadvantages of a fixed rate mortgage?

A fixed rate loan usually has a higher rate versus an adjustable-rate mortgage or interest only mortgage.

 

Deciding between a 15-year fixed mortgage versus a 30-year fixed mortgage?

 

The decision between a 15-year fixed mortgage versus a 30-year fixed mortgage really comes down to planning and desire to build equity. The longer term your mortgage, the more interest you will pay over the term of the loan. The shorter term, the less interest you will pay. It really comes down to what you can afford and what you want to plan for. 

 

15-year mortgages

The main advantage of the 15-year fixed mortgage is you will pay your loan off faster, and you will build equity quicker. You will pay a higher a monthly installment in exchange for shorter term loan. This will result in building equity in your home much faster versus a 30-year fixed mortgage. If you can afford the higher monthly payment along with your other monthly expenses, then it’s in your best interest to pay off the loan faster so you can own your home outright in 15 years. This is practical for someone looking to save money on interest payments which accrue over a 30-year fixed term versus the 15-year term.

 

30-year mortgages

Your monthly installment payments will be much less per month over the course of 30 years (360 months) than you would over 15 years (180 months). It’s unlikely your monthly payment will be half as much under a 30-year term versus a 15-year term because it depends on your interest rate. If a homeowner has more debt, its recommended to take a 30-year fixed mortgage so the monthly payment will be less. If borrower has low debt, then they have more-free cashflow to support monthly payments on a 15- year term.

 

Higher interest rates

Typically, a 30-year fixed mortgage has a higher interest rate then a 15-year fixed mortgage. This results in paying more interest over the longer-term loan. Typically, in a longer-term loan the rate is higher because there’s a higher probability of default over a 30-year term versus a 15-year term. The risk is mitigated by giving the borrower a higher interest rate.

 

More home for your money

A 30-year fixed mortgage enables you to buy more house for your buck. The monthly payments are lower; therefore, you can qualify for a larger loan amount if your based on a fixed monthly salary. The loan amount you qualify for depends on your credit score and debt to income ratio. Your credit score must be a minimum of 620 and it is recommended to have 700 FICO or higher to get the best interest rate and to qualify for the highest loan amount possible. If your scores are low, there are credit repair companies you can use to help boost your FICO score. The other variable in consideration for how much home you can buy is your debt-to-income ratio. The debt-to-income ratio is calculated by adding up all your expenses (credit cards, car loans, and any other installment payments) plus your living expenses then divided into your total monthly income.  For example, you have a $1,000 car payment, you pay $1,000 per month to credit cards and your paying $3,000 per month rent. You add all these up which comes to $4,500 per month as your debt. Your income is your monthly gross income from your employer, lets simulate that you make $15,000 per month. In this case, you would take $5,000 which is your total monthly obligations and divide into $15,000 which is your total gross monthly income. The result is 33%, your debt-to-income ratio is 33%. In other words, 33% of your income is applied towards your monthly debt. This percentage is the best scenario for a borrower to be in, some lenders can go up to 45% debt to income ratio to approve you for loan. 

 

More cashflow for you in a 30-year fixed

The main advantage of a 30-year fixed is you will have more disposable income. The lower monthly payment gives you the flexibility to save money for a remodel, put money away for a college fund, save for a nice vacation or just build a nice reserve for yourself on a rainy day.

 

 

 

 

 

 

 

Questions?

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