What Is a Fixed-Rate Mortgage and Why Is It Important?

There are various types of mortgages, and it’s crucial to take the time to find the one that fits your financial situation best. A mortgage lender can guide you through important decisions, such as understanding how interest rates impact your loan, deciding whether to buy down your rate with points, locking in your rate, choosing between a fixed-rate or adjustable-rate mortgage, and exploring programs that could save you money. Let’s break this down: What is a Fixed-Rate Mortgage? A fixed-rate mortgage is a type of home loan where both the interest rate and the repayment period remain the same throughout the life of the loan. This means your monthly payments will be consistent, though the amount applied to the principal and interest will vary over time due to a process called amortization. The only costs that might fluctuate are property taxes and homeowner's insurance. How Mortgage Rates Affect Your Loan The interest rate on your mortgage determines how much you’ll pay to borrow money for your home purchase. It’s expressed as a percentage of the loan amount. Several factors influence the rate a lender offers, including your credit score, down payment amount, and debt-to-income ratio. Lenders have different criteria, so it’s always a good idea to shop around and compare offers. If you opt for a fixed-rate loan, you can lock in your rate any time after signing the purchase agreement, up until closing. Types of Fixed-Rate Mortgages Here are the most common types of fixed-rate mortgages: FHA loans: Popular among first-time homebuyers and accessible to those with lower credit scores. Conventional loans: Available from a wide range of lenders, often with lower down payment requirements. 30-year fixed-rate: Offers lower monthly payments, making it a popular option. 15-year fixed-rate: Results in less interest paid over the life of the loan but requires higher monthly payments. 20-year fixed-rate: A middle ground between affordable payments and lower overall interest. 10-year fixed-rate: Best suited for those who can afford higher payments and want to pay off the loan quickly. Fixed-Rate vs. Adjustable-Rate Mortgages When financing a home, you'll choose between a fixed-rate mortgage and an adjustable-rate mortgage (ARM). A fixed-rate mortgage keeps the interest rate stable for the life of the loan, while an ARM starts with a lower interest rate but can increase after the initial period. An ARM is often appealing for those planning to sell their home before the rate adjusts, as the initial rate is usually lower than a fixed rate. However, if you plan to stay in the home long-term or prefer more predictable payments, a fixed-rate mortgage may be the better choice. How Does a Fixed-Rate Mortgage Work? During the loan process, you’ll make decisions that dictate your loan terms, including whether to opt for a fixed-rate mortgage or an ARM. Here's a breakdown of key factors: Loan program: Two common types are FHA and conventional loans. FHA loans are government-backed and accessible to buyers with limited savings or lower credit scores. Conventional loans, which are not government-backed, often come with stricter requirements but can offer lower interest rates and other favorable terms. Loan term: Fixed-rate mortgages typically come in terms of 10, 15, 20, or 30 years. A shorter term means less interest paid overall, but it also means higher monthly payments. For example: A 30-year loan of $300,000 at 6% interest will cost roughly $1,799 per month, with $347,515 in total interest. A 15-year loan for the same amount will cost about $2,532 per month, with $155,683 in total interest. A 20-year loan offers a compromise between affordable payments and total interest, with monthly payments of about $2,149 and total interest of $215,831. Amortization: With a fixed-rate mortgage, each monthly payment covers both the principal (the loan amount) and the interest (the cost of borrowing). Over time, more of your payment goes toward reducing the principal balance as the interest portion decreases. Interest Rates Interest rates vary based on the loan program and lender. It’s wise to compare rates by getting pre-qualified or pre-approved with multiple lenders, which typically involves a soft credit pull that won’t affect your credit score. Pros and Cons of Fixed-Rate Mortgages There are benefits and drawbacks to fixed-rate mortgages. Here’s what to consider: Advantages: Predictable payments: Knowing your monthly payment amount can help you budget more effectively. Lower risk: You’re protected from potential interest rate hikes. Lock in a low rate: If rates are low when you apply, you can lock in the rate and avoid future increases. Disadvantages: Higher initial rates than ARMs: While ARMs start with lower rates, fixed-rate mortgages are more stable but may not be ideal if you plan to sell your home quickly. Less flexibility: If rates drop, you’ll need to refinance to take advantage of the lower rates, which involves additional costs. Should You Get a Fixed-Rate Mortgage? Choosing a fixed-rate mortgage depends on your financial goals. If you value stability and plan to stay in your home for at least five years, a fixed-rate mortgage can provide long-term financial benefits. It’s always best to consult with a loan officer to help you make the most informed decision.

8 Steps to Boost Your Credit Score

There are many reasons you might want to improve your credit score. If you’re preparing to buy a home, a higher score can help you qualify for better mortgage rates. If you’re working your way back from financial challenges, boosting your credit is even more critical before applying for a home loan. Improving your credit score takes time. Since credit scores are based on your long-term credit history, it’s important to start building healthy credit habits as soon as possible. With consistent effort, you may start seeing improvements in just a few months. Even if your credit score is low, buying a home is still possible. Pre-qualifying for a loan and being upfront with your lender about any credit challenges can help you work together to find the right financing solution. The steps below can help you improve your credit profile over time. And if you’re just starting out, here are some useful tips for building credit. What is a Credit Score? A credit score estimates your likelihood to repay a debt based on your past financial behavior. The three main credit bureaus—Equifax, Experian, and TransUnion—gather data on your credit history to calculate your score. Two main models are used to calculate credit scores: FICO and VantageScore. FICO vs. VantageScore: What’s the Difference? The VantageScore is commonly seen on credit monitoring apps, but FICO scores are typically used by mortgage lenders to assess your credit risk. FICO scores require at least six months of credit history, while VantageScore calculates after just one month. Both now use a range of 300 to 850, though they weigh various factors differently. If you’re improving your credit score to buy a home, it’s important to keep an eye on both scores. The VantageScore is easier to track, while your lender will use your FICO score when evaluating your mortgage eligibility. Factors That Affect Your Credit Score Several factors contribute to your FICO score: Payment History (35%): Paying bills on time is the most significant factor. This includes credit card payments, car loans, and even cell phone bills. Credit Usage (30%): This is based on how much of your available credit you use. Keeping a low balance shows you’re a responsible borrower. Length of Credit History (15%): The longer your credit history, the better. Credit Mix (10%): Having a variety of credit accounts, such as installment loans and revolving credit, can positively impact your score. Recent Activity (10%): Opening new lines of credit too frequently can lower your score. What Is Considered a Good Credit Score? FICO scores range from 300 to 850. Generally, a score above 670 is considered “good,” while anything above 740 is “very good” or “exceptional.” 300-579: Poor 580-669: Fair 670-739: Good 740-799: Very Good 800-850: Exceptional Why Does Your Credit Score Matter? A good credit score not only helps you qualify for a mortgage, but it can also secure a lower interest rate, saving you thousands over the life of your loan. How Long Does It Take to Improve Your Credit Score? The time it takes to improve your score depends on your starting point and why it’s low. You may see improvement within a few months by making on-time payments, paying down balances, and disputing any errors on your credit report. Larger changes, such as moving from a "fair" to a "good" score, can take up to a year. However, fixing more serious issues like late payments or accounts in collections can take longer. Negative marks like late payments stay on your credit report for seven years, and bankruptcies can stay on for up to 10 years. Still, taking consistent steps to improve your credit can have a meaningful impact. Steps to Improve Your Credit Score Here are a few steps you can take to start improving your credit score quickly and over time: 1. Monitor Your Credit Score Regularly check your credit report to ensure everything is accurate. You’re entitled to a free report from each of the three bureaus once a year at AnnualCreditReport.com. Credit monitoring tools are also available to track your progress and alert you to any changes. 2. Dispute Errors If you find errors on your credit report, dispute them with the credit bureaus directly. Correcting mistakes can give your score a boost. 3. Pay Off Delinquencies Pay off overdue bills and settle accounts in collections as soon as possible. This won’t erase the late payment history, but it will stop ongoing negative marks. 4. Set Up Automatic Payments Late payments are a major factor in low credit scores. Set up auto-pay for bills to ensure you never miss a due date. 5. Reduce Credit Card Balances Try to keep your credit utilization below 30% of your available credit, and under 7% for the best impact on your score. If possible, pay off credit card balances in full each month. 6. Don’t Close Accounts Even if you’ve paid off a credit card, keep the account open. Closing accounts can shorten your credit history and raise your credit utilization ratio. 7. Avoid Opening New Accounts Refrain from opening new credit lines while working on improving your score. Each hard credit inquiry can negatively affect your score for up to two years. 8. Consider a New Account if Needed In some cases, opening a new credit account might help, particularly if it lowers your overall credit utilization or offers a balance transfer deal. Just be mindful of the fees and how it affects your overall credit profile. Can You Buy a House with Bad Credit? Even if your credit isn’t perfect, buying a home is still possible. Be transparent with your lender about your situation, and get pre-qualified before shopping. Some loans, like FHA loans, allow for lower credit scores, so it’s important to explore your options early. With the right steps and patience, you can improve your credit score and put yourself in a better position for homeownership.

How Are Mortgage Rates Determined?

When you check with a lender, you’ll see advertised mortgage rates. But will you qualify for those rates? It all comes down to risk—the higher the risk for the lender, the higher the interest rate you’ll pay. Lenders base your mortgage interest rate on several factors—some you can control, and others you can’t. Understanding why rates vary and how even a small increase can add up over the life of your loan is important. The good news is that mortgage rates can be negotiable, so it’s worth comparing rates from different lenders to find the best deal. What Factors Determine Interest Rates? Credit Score:Your credit score is one of the biggest factors in determining your rate. Generally, the higher your score, the better rate you’ll get. Lenders use FICO scores, which range from 300 to 850. A score above 720 is often the cutoff for getting better rates without adjustments, but you may get even better rates with higher scores. Loan-to-Value Ratio and Down Payment:Lenders also look at the loan-to-value (LTV) ratio, which compares the size of your loan to the value of the home. A larger down payment lowers your LTV, making you less risky to the lender and possibly earning you a lower interest rate. If your LTV is higher, you might have to pay for private mortgage insurance (PMI). Loan Purpose and Type:Whether you’re buying a home, refinancing, or doing a cash-out refinance can affect your rate. Typically, cash-out refinances come with higher rates. The loan type—fixed-rate or adjustable-rate—also impacts your rate, with adjustable-rate mortgages (ARMs) often starting with lower rates than fixed-rate loans. Loan Term:Shorter-term loans, like 15-year mortgages, tend to have lower interest rates than 30-year loans. However, your monthly payments will be higher with shorter terms. Loan Amount:Smaller loans can sometimes have slightly higher rates, while loans closer to the upper limits of conforming loan amounts may have slightly lower rates. Jumbo loans, which exceed conforming limits, generally come with higher rates. Location:Your home’s location can also affect your rate. Lenders may charge higher rates in areas with a higher risk of default or where foreclosure laws make it harder to recoup their losses. How to Lower Your Mortgage Rate Improve Your Credit Score:Raising your credit score can make a big difference in the rate you qualify for. Start by checking your FICO score and review your credit reports for any errors that could be bringing your score down. Increase Your Down Payment:A larger down payment reduces the lender’s risk, which could help you qualify for a better rate. Talk to your lender about how your down payment and credit score affect your rate. Pay Points on the Loan:You can lower your interest rate by paying mortgage points, which are fees paid upfront to the lender. One point equals 1% of your loan amount, and paying points lets you reduce your interest rate in exchange for a fee. This can be a good option if you plan to stay in the home for a long time. Understanding how mortgage rates are determined and what steps you can take to lower them can help you save money over the life of your loan.

How Does a 1% Interest Rate Increase Impact Your Buying Power?

Even small changes in mortgage rates, like 1% or even 0.5%, can significantly impact how much you’ll pay over the life of your loan.   When you're considering buying a home, it's easy to focus solely on the price to determine whether it fits your budget. However, mortgage rates play an equally important role in affordability, and they may have changed since the last time you did the math. Mortgage interest rates fluctuate frequently, and even small changes can significantly impact not only your monthly payment but also how much you can afford to spend on a home. With the volatility in the mortgage market over the past couple of years, understanding how interest rates affect your buying power is crucial. Here's how mortgage rates influence your monthly payment: How do mortgage rates affect your monthly payment? Each month, your mortgage payment covers both the principal—the amount you borrowed—and the interest on that loan. Early payments typically consist of more interest, while later payments gradually shift toward paying down the principal. Even small changes in interest rates can significantly affect your monthly payments and how much house you can afford. A half or full percentage point in either direction can open or limit your options. How much difference does a 1% change in mortgage rate make? Let’s break down how a 1% change in mortgage rates can affect your monthly payment and buying power. In these examples, we assume a 20% down payment and a 30-year fixed-rate mortgage. Taxes and insurance are not included in the calculations. For a typical U.S. home valued at $346,900: At a 7% interest rate, your monthly payment would be $1,846. At 6%, your payment would drop to $1,664—a savings of $182 per month. Over 30 years, this 1% drop would save you $65,691 in interest. If your budget is $1,846 per month, a 1% rate drop would allow you to afford a home costing $30,480 more without increasing your payment. For a home in San Diego valued at $919,800: At a 7% rate, the monthly payment is $4,896. At 6%, it drops to $4,412—$484 less per month. Over 30 years, you’d save $174,178 in interest. A 1% rate drop could let you afford $80,772 more on a home without raising your payment. Similar calculations can be made for homes in different markets, like Atlanta, Dallas, and Pittsburgh, showing how just a 1% drop in rates can greatly improve your purchasing power. How much difference does a 0.5% change in mortgage rate make? Even a half-point change in interest rates can have a noticeable impact on what you pay monthly. For example: For a home in Phoenix valued at $451,600: At a 7% rate, your payment is $2,404. At 6.5%, it drops to $2,284—a savings of $120 per month. Over 30 years, you’d save $43,233 in interest. A 0.5% rate drop could allow you to afford $19,059 more on a home without increasing your payment. Tips for navigating volatile mortgage rates With rates constantly changing, here are a few tips to help you handle the uncertainty: Build flexibility into your budget: Ensure you have room in your budget for rate changes, especially if you’re shopping at the upper end of your price range. Talk to lenders: Work with a lender you trust to explore financial scenarios and the possibility of buying down the interest rate. Prepare your finances: Strengthen your credit score to qualify for the best rates. Lock in your rate: Once you’ve signed an agreement to purchase a home, consider locking in your mortgage rate to protect yourself from future increases. Consider refinancing later: If rates drop after you buy, refinancing can save you money in the long run, though it comes with closing costs. Should you wait for mortgage rates to drop? No one can predict exactly when or how rates will change, so waiting for a rate drop might not always be the best strategy. Home prices could rise in the meantime, offsetting any potential savings from a lower rate. It’s wise to start building relationships with lenders early and keep an eye on the market, but don’t miss out on the right home if you can afford it now.