Finances

Fixed-rate mortgage: what it is, pros and cons

Is a fixed-rate mortgage the right choice for your needs? Keep reading to find out. Our comprehensive guide will provide all the information you need! Stick around and learn more.

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Fixed-rate mortgages explained

Fixed rate mortgage is shown on the business photo using the text
Fixed-rate mortgages explained! Source: Adobe Stock

Are you exploring different mortgage options to finance your dream home? Then you might have wondered what a fixed-rate mortgage is and if it’s right for you!

Business concept meaning Mortgage Closing Costs with phrase on the piece of paper.

What are mortgage closing costs?

Are you wondering what closing costs are? Wonder no more! Keep reading and learn how they work and how they impact your home-buying process.

Read on and learn everything you need about this type of loan! You’re one step closer to achieving homeownership as smoothly as possible. Let’s go!

What is a fixed-rate mortgage, and how does it work?

As the term suggests, a fixed-rate mortgage is a type of home loan with an interest rate that will remain the same through the loan terms.

Simply put, you will be paying the same interest rate throughout the life of the loan. Therefore, your payments will also be the same every month.

Fixed-rate mortgages are very popular among borrowers since they’re more stable and predictable than other types of loans. This way, borrowers face no surprises with their payments.

Terms

Regarding repayment terms, most borrowers can expect fixed-rate mortgages offering 15 and 30 years terms.

However, some lenders might vary the payment terms, offering more flexibility. As a result, you might also find mortgage options with 10 and 20 years terms.

Still, the 30-year term is nearly the biggest choice among borrowers currently.

What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?

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The difference between a fixed-rate mortgage and an adjustable-rate mortgage. Source: Adobe Stock

The first decision many homeowners face is whether to choose a fixed or adjustable mortgage. While this may seem daunting initially, understanding it can help you save a lot.

As said, the main characteristic of a fixed-rate mortgage is the fixed interest rate!

Since it is locked, borrowers can count on a stable rate and make the same monthly payment.

On the other hand, an adjustable-rate mortgage (ARM) comes with interest that changes over time.

In other words, borrowers can pay more or less, fluctuating with the market.

Commonly, lenders offer an introductory rate for the first five to ten years. After that, the interest can either go up or down.

Pros and cons of a fixed-rate mortgage

Most homeowners want to find the perfect mortgage that suits their financial needs, and a fixed-rate mortgage is often at the top of their list.

It’s easy to understand why – having a home loan with an interest rate that won’t change over time makes it easier to budget and plan your finances for many years.

However, like any financial product, you might face some downsides too.

Let’s check the pros and cons of a fixed-rate mortgage to help you make a more informed decision.

Benefits

  • Your interest rate will not fluctuate with the market, meaning it won’t increase over time;
  • Most fixed-rate mortgages won’t charge prepayment penalty fees;
  • You can predict your monthly payments through the life of the loan;
  • It makes budgeting easier.

Downsides

  • Most fixed-rate mortgage count on more strict eligibility criteria;
  • The fixed-rate mortgage might have higher rates than adjustable-rate mortgages;
  • If the rates fall, you won’t benefit from it;
  • Most fixed-rate mortgages are secured by the property, meaning that if you default on your payments, you can lose it;
  • Higher initial payment.
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5 things to do before applying for a mortgage

We have created this checklist of things you must do before applying for a mortgage! Check it out before getting started!

Types of fixed-rate mortgages

There are several types of fixed-rate mortgages. And the repayment terms are not the only factor that differs them. Let’s check it out below!

Conventional Loans

Conventional loans are usually issued by banks, credit unions, online lenders, or other lending institutions. Mostly, they have more strict requirements.

Thus, applicants can qualify with a minimum credit score of 620 and a debt-to-income ratio of no more than 43%.

Government-backed loans

Regarding government-backed loans, borrowers can count on FHA, VA, and USDA loans. These types of home loans have lighter requirements.

While FHA loans and more available for borrowers, USDA are destined to designate rural areas.

On the other hand, VA loans were designed for military service members and their families.

Potential borrowers might qualify with fair credit and no down payment. Making it a good choice for those who are eligible.

Conforming and Non-conforming Loans

Couple with a laptop doing finance paper work, paying debt insurance loans or online ebanking together at home. Two serious people planning and looking at financial document, bills rate for mortgage
Types of fixed-rate mortgages. Source: Adobe Stock

As the term might suggest, conforming loans are those that adhere to the requirements set by the Federal Housing Finance Agency (FHFA). This refers to the determined loan limit.

On the other hand, non-conforming loans won’t meet the FHFA requirements.

Therefore, they include a higher loan amount, which is the case of Jumbo loans.

Amortizing and Non-amortizing loans

With amortizing loans, your monthly payments go toward the principal and the interest charges. It allows you to build equity in your home from day one.

When it comes to non-amortizing, borrowers can count on lowers monthly payments that will cover interest only for a period. After that, you might face an outstanding balance.

How to get a fixed-rate mortgage?

Before any move, you’ll need to shop around before choosing a lender. This way, you can compare your options and find the product for your specific needs.

Remember to look closely at rates, terms, fees, and other conditions lenders might offer. You don’t want to end up paying more than you should’ve.

After choosing, you’ll need to fill out your application. Most lenders let you prequalify online by providing your basic and financial information.

If you’re pre-approved, you’ll need to complete your application. You’ll have to provide some additional information and documentation. Lenders might request:

  • Tax returns;
  • Pay stubs, W-1s, or other proof of income;
  • Bank statements and other assets;
  • Credit history;
  • Gift letters;
  • Photo ID;
  • Renting history.

These are only general documentation. Therefore, these requirements might change from lender to lender. Make sure to check it before applying.

Is a fixed-rate mortgage the best option for you?

As you’ve seen, a fixed-rate mortgage is an excellent choice for anyone looking for stability.

It allows you to lock in an interest rate and make the same payment through the loan term.

However, only you can decide if it is your best option! So remember to analyze your financial situation and your personal needs.

So why not start by doing some research? Check below for an excellent choice for achieving homeownership.

Freedom Mortgage offers multiple loan types, including fixed-rated loans and other perks. Read on and learn more.

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Freedom Mortgage review

Learn about the advantages of this lender in this Freedom Mortgage review, including the quick and easy prequalifying process, and more!

About the author  /  Luis Felipe Regueira

I needed to learn about finances when I was in culinary school and wanted to save money to start my own business. So I haven't stopped because I believe studying and writing about the topic can help more people achieve their goals. Currently, I write about finances and run a small coffee shop.

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