Several important factors influence the purchase of a property. Regardless of whether you choose a VA, FHA, USDA, or conventional loan, you need to decide if you want to apply for a fixed-rate mortgage or an adjustable-rate mortgage (ARM). In this guide, we explain how fixed-rate mortgages work and why you might want to consider this option for your next home loan.
Fixed-Rate Mortgages: Interest Rates and Terms
The advantage of a fixed-rate mortgage is the principal, and the interest rate remains the same. Although property taxes and insurance premiums may increase, which will impact the total monthly mortgage payment, this amount is known in advance, allowing you to budget accordingly.
The term of a mortgage refers to the number of years you agree to pay back the money you have borrowed plus interest. For fixed-rate mortgages, terms normally vary from 10 to 30 years; the typical increments are 10, 15, 20, and 30 years. There are three key considerations when deciding which term to choose:
- Affordability: The longer the term, the lower the monthly payment will be. This can enable you to purchase a more expensive property.
- Interest Rate: The interest rate may be higher when you choose a longer term.
- Overall Cost: A longer term will increase the overall cost of the loan.
Related Reading: What Are the Most Common Types of Mortgages?
How to Get the Best Mortgage Rates
Although mortgage rates only typically differ by a few basis points between lenders, what may seem like an insignificant difference can result in thousands of dollars in savings over your mortgage term. Here are some tips for securing the best mortgage rates:
- Review Your Credit Score and Report: Your interest rate and loan terms are largely influenced by your credit score. That is why it’s important to check there are no errors or fraudulent activity. Visit AnnualCreditReport.com to obtain a free copy of your credit report.
- Bigger Down Payment: Buyers who make larger down payments are lower risk and likely to qualify for lower interest rates.
- Lower Your Debt-to-Income (DTI) Ratio: The DTI ratio is based on the percentage of your monthly gross income that goes towards debt payments. Making larger credit card payments or paying off loans can reduce your DTI ratio and increase your chances of getting a lower interest rate.
- Compare rates: Obtain at least three quotes from different lenders. But make sure you consider the extra costs, such as the origination and application fees, which can cancel out the potential savings on a lower interest rate.
- Think About Buying Mortgage Points: Mortgage points, sometimes referred to as mortgage discount points, means paying a lender in advance for a lower interest rate. Buying points may make sense if you want to stay in the property for over six years. However, buying points might not be the best choice if you intend to refinance or move within six years.
Adjustable- Rate Mortgages (ARMs) vs Fixed-Rate Mortgages
Your financial circumstances and goals can help determine the best mortgage option for your current situation. There are benefits to each type of mortgage, and it’s essential to consider your future plans and financial circumstances before deciding between a fixed-rate or an adjustable-rate mortgage (ARM).
Choosing an ARM loan can be beneficial if:
- You plan to spend a short time in the property
- You anticipate your income will rise
- Interest rates are high.
Choosing a fixed-rate loan makes more sense if:
- You plan to remain in the property for a long time
- You want your mortgage payments to remain the same
- Interest rates are low.
You now have the opportunity to take advantage of a special 5.99% fixed loan rate (6.520% APR) on a small number of DSLD Quick Move-In Homes through January only. In addition, use DSLD Mortgage and preferred title provider and DSLD Homes will give you up to $10,000 for closing costs. Restrictions apply.
Fixed-Rate Mortgages Pros and Cons
| Pros | Cons |
| If interest rates rise, monthly mortgage payments will not increase. | Fixed-rate mortgages tend to have higher rates than adjustable-rate mortgages (ARM). |
| If interest rates drop, monthly mortgage payments will not reduce. |
ARM Mortgages Pros and Cons
| Pros | Cons |
| Lower monthly mortgage payment during the introductory period. | Interest rates can rise, which will increase monthly mortgage payments. |
| Interest rates may drop, resulting in cheaper mortgage payments each month. | |
| If you sell before the introductory rate concludes, you can save money when interest rates are high. |
Eligibility Criteria for Fixed-Rate Mortgages
Eligibility criteria are based on your credit score and will depend on the type of mortgage you choose and the down payment you can make. Below is a table with the key information you need to understand about eligibility criteria for different types of mortgages.
| Mortgage Type | Requirements | Credit Score | Down Payment |
| VA Loan |
|
No minimum, however 620 is often required. | Not required |
| Federal Housing Administration | Anyone can apply for FHA loans |
|
3.5% |
| USDA |
|
No minimum; however, 640 is standard. | Not required |
| Conventional | Anyone can apply for Conventional Loans. | 620 is standard. | 3% |
The Advantages of Mortgage Pre-approval
Pre-approval for a mortgage involves a comprehensive financial evaluation to determine your eligibility for a home loan. This is a key phase in the homebuying process and offers potential homeowners numerous advantages. Check out the reasons mortgage pre-approval matters and why obtaining one is a must for purchasing your ideal property.
This is how having a mortgage pre-approval gives you an advantage.
- Immediate Credibility: Sellers view you as a prepared and dedicated buyer when you provide this document alongside an offer. In a situation with a fierce bidding process, immediate credibility is significant.
- Diminished Seller Risk: A pre-approval letter gives sellers the reassurance that you successfully completed a stringent financial evaluation and are suitably equipped to obtain the required funding. As a result, they are more likely to give your offer priority.
- Accelerated Transaction Process: Since a large portion of the preliminary due diligence, including credit checks and financial analyses, is done, pre-approval speeds up the transaction process, and that’s likely to entice sellers who need to sell quickly.
It’s critical to remember that a pre-qualification letter is an official statement from the lender indicating that they are provisionally willing to lend you money up to a specific loan amount. This is not a representation of a loan offer; instead, it is based on specific considerations.
When to Refinance to a Fixed-Rate Mortgage
There are various reasons to refinance, but one of the most popular ones is to move from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. As a general principle, when interest rates are low, refinancing to a fixed-rate loan offers the greatest advantage.
You will be required to pay closing costs for your refinance, which means refinancing may not be advisable if you want to sell your home in a few years. You will also be paying interest on closing fees if you roll them into your mortgage rather than paying for them upfront, so you must account for this in your break-even analysis.
Interest Rate and APR Key Differences
Two phrases you’ll come across when researching various mortgage options are interest rate and annual percentage rate (APR). Even though they may appear similar, making an informed choice calls for understanding the distinction between interest rate and APR:
- Interest Rate: The annual percentage added to the loan amount is known as the interest rate. This corresponds to the annual interest payment amount.
- Annual Percentage Rate (APR): View the APR as a more complete representation of the actual cost of your loan. It includes the interest rate and any other costs related to getting the mortgage, such as origination, application, and appraisal fees, plus private mortgage insurance (PMI) when the down payment is under 20%.
Related Reading: What Makes up Your Monthly Mortgage Payment?
How to Establish and Keep a Good Credit History
Establishing a credit score and keeping it in good shape is essential to securing the best interest rates and terms when applying for a mortgage. Here are our top tips for getting started, improving, and maintaining a good credit score.
Three Tips to Build a Credit Score
- Get a secured credit card: If you have a bad credit history or none, a secured credit card is easier to get and can help you build or improve your credit score.
- Get Permission to be an Authorized User: Ask your partner, family, or friends if you can be an authorized user on one of their credit cards.
- Obtain a credit-building loan: These work differently from a conventional loan and, as opposed to giving money to the borrower and expecting them to pay it back, the lender transfers the money into a certificate of deposit (CD) or savings account that you can only use when you have paid off the entire loan with interest.
Three Tips to Improve and Maintain a Good Credit Score
- Make Payments on Time: Paying your credit card and loans on time is one of the most important things you can do to build and maintain a good credit score. Missed payments and late payments can have a negative impact on your credit score. If you are behind with payments, contact the lender to negotiate a payment plan.
- Don’t Max Out Your Credit Cards: While it may be tempting to spend up to your credit limit, this can have a detrimental effect, even if you always make payments on time. The general advice is to remain at least 30% below your credit limits.
- Limit Your Loan and Credit Card Applications: Avoid applying for more than two credit cards or loans within a six-month period. Applying for multiple new credit cards or loans within a short period can immediately affect your credit score, regardless of whether you are approved.
Not Sure Where to Begin With Your Home Loan?
It’s normal for many first-time home buyers to have inquiries regarding the mortgage loan application procedure. ???? We provide homebuyers with an extensive database of information on our site. For more information on the mortgage application process overall, visit Our Homebuying Guide — Mortgage Tips.
Purchasing a home is one of your biggest financial decisions, so you want a mortgage solution that fits your objectives. Our knowledgeable team of mortgage financing specialists can assist you in applying for a VA, FHA, USDA, or conventional loan.
Allow us to give you everything you need to choose the right mortgage for your requirements for a better financial future. Become a homeowner sooner by contacting one of our experienced Loan Officers for a free loan consultation and personalized recommendations. You can usually pre-qualify for a home loan in less than 24 hours, bringing you nearer to purchasing your ideal property.
To locate a mortgage loan originator in your local area and schedule a free consultation with DSLD Mortgage, or find a local loan officer. Competitive mortgage rates, better terms, and your ideal home are all within your reach with our help.
Article Sources:
- Forbes Advisor “7 Tips To Get The Best Mortgage Rate” January 30, 2024
- Investopedia “Fixed vs. Adjustable-Rate Mortgage: What’s the Difference?” July 24, 2023
- Forbes Advisor “How To Get A Mortgage Pre-approval” Updated March 25, 2024
- Investopedia “Interest Rate vs. APR: What’s the Difference?” Updated July 17, 2023
- Experian. “What Affects Your Credit Scores?” July 29, 2023
