While each one has its pros and cons, there are some essential things to keep in mind about fixed-rate mortgages and lender fees that you may not have heard of before. Read on to find out more about these two mortgage topics so that you can make a wise decision when the time comes to finance your next home purchase.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage (FRM) is essentially a loan that comes with a predetermined interest rate for an agreed-upon period. This means if you get a 30-year fixed-rate mortgage, you'll pay exactly the agreed interest percentage on your loan each month for 30 years.
The advantage of a fixed-rate mortgage, in contrast to an adjustable-rate mortgage (ARM), is that you can predict how much your monthly payments will be during the life of the loan. Your monthly payment amount remains constant unless you prepay your mortgage or refinance another loan with different terms and conditions. There's no pre-payment penalty for paying off your loan early.
This makes fixed-rate mortgages ideal for those who are unsure of how much they can afford each month or who anticipate their income rising or falling within a specific range. If you're planning to stay in your home for more than a few years, you may want to consider locking in a lower interest rate with a 30-year fixed-rate mortgage.
How to Find a Fixed-Rate Mortgage
Fixed-rate mortgages are the most typical type of mortgage, so it's no surprise that they make up most mortgage products on the market. Figuring out how to find the right FRM can be daunting, especially if you don't have any experience with the home buying process.
The problem is that various lenders offer different fixed-rate mortgage products, making it even hard to choose one that meets your needs and fits your budget. To help you find the right fixed-rate mortgage, we've broken down the most critical elements you need to look for when shopping around for your new home loan. Be sure to understand the following features before attempting to select the right FRM to meet your specific needs:
The All-Important Interest Rate
The interest rate is your monthly payment's anchor, so it's crucial that you understand what will impact it and whether a given loan fits within your long-term financial plan. The interest rate is calculated as a percentage of your loan amount (an annual percentage rate, or APR). Generally speaking, rates are lowest on loans with longer terms—up to 30 years.
Beware of lenders promising to offer exactly what you need without confirming your qualifications. No reputable lender will to an interest rate without reviewing your entire loan application forms and credit history. Looking to boost your credit score? Learn ways to do so here.
Understand the Finer Points of Points
If you blindly pick a 5.75% fixed-rate loan, you could be making an expensive mistake. It would be best if you didn't judge a mortgage by its interest rate points. These points are up-front interests. Your lender will charge points to get themselves paid for the work and expenses of processing and approving your loan. They typically quote "points" as a percentage of the mortgage amount, and you'll be required to pay them during closing and then begin the lengthy process of repaying your loan.
Don't be lured to believing that the"no-point" loans are ideal. If you pay less or zero points, the constant interest rate will be higher. For instance, a 5.25% loan costs $828 monthly, and a 5.75% costs $875 per month. You'll save $47 per month with the 5.25% loan, but you'll have to pay $1500 for points to get it. However, the answer to which mortgage option you're supposed to choose depends on how long you want to keep your loan.
When applying for a fixed-rate mortgage, one of the fees you may have to pay is the lender's fee. The lender's fee can be used to cover your application costs and other charges associated with your loan. So you need to ensure that you can afford it if you plan on getting the loan. These particular fees include:
Application and Processing Fees - Your lender will generally charge you between $500 and $1200 as an application and processing fee.
Credit Report - This won't cost you much, but you can expect to spend $75 to $125 for your lender to obtain your complete credit report.
- The Appraisal Fee - This will vary depending on your potential property's complexity, size, and value. However, expect to pay about $300 to $500 and up to $1500 for a more expensive home.
With so many kinds of mortgages to choose from, it can be hard to know which one is right for you. There are fixed-rate mortgages, adjustable-rate mortgages, zero-down mortgages, jumbo mortgages, and more. While each has its edges and drawbacks, you must understand some crucial things about fixed-rate mortgages and lenders' fees. Understanding these two subjects will help you have a flawless home-buying process and avoid future consequences when servicing your mortgage. Keep reading about fixed-mortgages here.