The type of mortgage you qualify for will have a serious impact on how much house you can afford. Buying a house also involves looking at the future – will you be able to afford your mortgage payments in 5 years, 10 years or even 20 years from now? How will you deal with fluctuating interest rates?
Fixed-rate mortgages offer certainty in a market where interest rates can be volatile. Just like any loan, however, it comes with conditions – some of which you may not be comfortable with.
Here are five essential things to know before committing to a fixed-rate mortgage
1. Fixed-rate mortgages make it easier to financially plan ahead.
Like the name implies, a fixed-rate mortgage has an interest rate that does not change for the duration of your loan. That means your monthly mortgage payment will be the same, every month, for 15 years, 30 years, or however long you agree to the loan.
This stability can make it much easier to plan your finances, both in the short and long term. If you want to turn your property into passive income, for instance, Denver property management companies can help you price your rental units to ensure you’re bringing in enough money to cover the mortgage.
Fixed interest rates also make it easier to budget for things like home improvement projects and other one-time expenses. You’ll know exactly how much your mortgage payment will be, simplifying calculations and giving you more financial certainty.
2. It can be harder to qualify for a fixed-rate mortgage.
Bankrate explains that lenders apply stricter eligibility criteria for these types of loans. To qualify, you may need:
- A higher credit score
- A lower debt-to-income (DTI) ratio
- A larger down payment
- Proof of income and a history of employment stability
These requirements exist because, with a fixed-rate mortgage, the lender accepts more risk. They want to be sure that you’re a qualified borrower who is unlikely to default on the loan.
Having bankruptcy on your credit file could also make getting approval more difficult, however it does not necessarily rule you out. This is something you should discuss with your AZ bankruptcy attorney to learn all your available options.
3. You may have to pay private mortgage insurance (PMI).
If you don’t have a lot of cash on hand for a down payment, you may have to pay PMI. This is an insurance policy that protects the lender in case you default on the loan.
The good news is that it’s possible for your PMI to be canceled once you’ve reached a certain level of equity in your home – usually 20%. You’ll need to submit a request in writing and provide evidence of the increased value of your home, such as a recent appraisal.
4. You may have to pay a little more upfront.
Amortization refers to the process of repaying a loan in equal installments over time. With a fixed-rate mortgage, the lender may require that you pay for a few years of amortization upfront. This is called a “prepayment penalty,” and it’s meant to discourage you from refinancing the loan early.
The penalty may take the form of a higher interest rate, a lump-sum payment, or an increase in your monthly payments. You need to decide whether that’s worth the stability and peace of mind that comes with a fixed interest rate.
5. You can save money on a 15-year vs. 30-year fixed-rate mortgage.
A 15-year fixed-rate mortgage will have a lower interest rate than a 30-year mortgage, all else being equal. That’s because you’re repaying the debt over a shorter period of time, so the lender is taking on less risk. Another reason is the shorter amortization period.
With a 15-year mortgage, you’ll also build equity in your home faster. You’ll own it outright sooner, and you can start using that equity to finance other things, like a home improvement project or your child’s education.
Of course, the trade-off is that your monthly payments will be higher. That’s another critical decision you need to make – is the lower interest rate worth the increase in your monthly payments?
To answer that, consider the following:
- How much can you afford to pay each month?
- What’s your plan for the property? Are you planning on selling it soon, or do you want to keep it for the long haul?
- What are your top financial goals, and how does this loan fit into that plan?
Make sure to sit down with other stakeholders as well, such as your spouse or partner, and discuss what you’re looking to achieve with this loan. By doing so, you can make the best decision for your unique circumstances.
While the predictability offered by a fixed-mortgage loan may sound attractive, it’s not the right choice for everyone. By doing your research and understanding all of your options, you can choose the loan that best suits your needs.
If you’re not sure whether a fixed-rate mortgage is right for you, consider speaking to a financial or a real estate agent. They can advise you on the most practical way to move forward.