Mortgage rates are seeing a downward trend but remain above 6.5%. NAR reports that the rate for a 30-year mortgage in mid-June was 6.69%. However, there’s good news for home buyers.
Inflation is at a two-year low and has dropped to 4%. This has triggered a slowdown in the economy. Consequently, mortgage rates will likely fall further until the end of this year and perhaps into the next year.
If you are planning to buy a house through a mortgage, this is a good time. Take advantage of the falling interest rates. But before proceeding, find out how a fixed-rate mortgage (FRM) can reduce your mortgage payments further.
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🚀 Key Takeaways
- Most Popular Mortgage Option: 90% of today’s home buyers opt for a 30-year fixed-rate mortgage .
- Credit Score Above 600: You need a credit score of at least 620 to apply for a conventional fixed-rate mortgage .
- 20% Down Payment: For any fixed-rate mortgage, you need to make an average downpayment of around 20% of the home’s value.
- No Pre-Payment Penalty: FRMs do not have pre-payment penalties. You can contribute more towards repaying the principal amount.
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a home loan that has a fixed interest rate throughout the term of the loan. This means you have to pay fixed monthly payments and don’t have to worry about coping with market fluctuations.
Did you know, fixed-rate mortgages are the most popular mortgage option in the U.S.? Well, anyone would prefer to know their expenses beforehand and plan their finances accordingly. That’s the biggest advantage of fixed-rate mortgages.
🤔 How Does a Fixed-Rate Mortgage Work?
When you opt for a fixed-rate mortgage, here’s what happens:
- You need to get approval for your mortgage application from the lender
- You have to pay the required down payment as per the mortgage lender’s policy
- After this, the loan amount is sanctioned which you can use to purchase your new home
- You pay the same amount of principal and interest amount every month.
- Your mortgage interest rate remains fixed the entire time, be it 15 years or 30 years.
- You get to plan your finances and choose the loan term period to suit your convenience
Example
Let’s say you want to purchase a home with a value of $300,000 and a loan term of 30 years at an interest rate of 6.69%. You have to make a down payment of 20% or $60,000. After that your mortgage will be sanctioned and your monthly payment will be calculated.
You have to pay around $1,547 every month for the entire term of the loan. This includes both principal and interest. The total interest you will be paying will be around $316,947. If you go for a 15-year fixed-rate mortgage, you will have to pay a lower rate of interest as the loan term is shorter.
Currently, the average rate for a 15-year fixed mortgage is 6.1%. If we take the same example of a $300,000 mortgage, at this rate, your monthly payment will be $2,038. You will pay a total interest of $126,884.
Calculate Fixed-Rate Mortgage Costs
Why rely on mortgage lenders to calculate your monthly payments? You can be prepared and calculate yourself with the help of a formula.
M= P[r (1 + r)n] / [(1+r)n – 1]
- M= Monthly Mortgage Payment
- P= Principal Amount
- r= Interest Rate
- n= Number of Monthly Payments
You can use this formula to calculate the average mortgage payment per month for any type of mortgage, including a fixed one. It can help you to understand whether a particular mortgage program is affordable or not.
What are the Fixed-Rate Mortgage Terms and Types?
Fixed-Rate Mortgage Terms
- 30-year Fixed: Home buyers prefer 30-year loans for the longer loan term. This allows monthly payments to be spread over 360 installments which makes them more affordable. The interest rate for 30-year loans is slightly higher than for 15-year loans because of the longer loan period.
- 15-year Fixed: The 15-year mortgage is a fixed mortgage with a shorter loan term and lower mortgage rate. If you want to get rid of the debt quickly and can afford it, you can go for a 15-year mortgage. Your monthly payments will be spread over 180 installments, which is exactly half of the 30-year number.
- Other Fixed-Rate Mortgages: Although 30-year and 15-year mortgages are the go-to loan options for home buyers, you can choose a 10-year, 20-year, or 40 year mortgage. It depends on how you want to divide your payments and how long you want to continue paying.
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🤔 30-year vs 15-year Fixed-Rate Mortgage: Which is Better?
A 30-year mortgage comes with a slightly higher interest rate but a lower monthly payment. On the other hand, a 15-year mortgage costs slightly less in terms of interest but has a higher installment.
Ultimately, you end up paying more interest for a 30-year mortgage but you can also afford the payments. The final choice depends on your ability to pay and your convenience.
Fixed-Rate Mortgage Types
- Conventional Fixed-Rate Mortgage: Conventional loans are available through online lenders, banks, credit unions, and other lending institutions. To get this loan you need to have a credit score of at least 620 and a debt-to-income ratio lower than 43%.
- Jumbo Fixed-Rate Mortgage: If you need a loan amount that exceeds the conforming loan limits, go for a Jumbo loan. You have to pay a higher interest rate than a conventional loan but the payments will remain fixed and you can choose the loan term.
- FHA, VA, USDA Fixed-Rate Mortgage: The government offers home loans that have comparatively less stringent requirements. FHA loans can be availed by any home buyer. USDA loans are meant for home buyers in specific rural areas. VA loans are for veterans, military service members, and their families.
- Conforming Fixed-Rate Mortgage: The Federal Housing Finance Agency (FHFA) has specified certain requirements for lenders. Conforming loans adhere to these requirements, including loan limits. They can be availed like any regular mortgage from lenders.
- Non-conforming Fixed-Rate Mortgage: Non-conforming loans do not adhere to the FHFA requirements. Jumbo loans are an example as they do not conform to the loan limit criteria. Interest rates are higher and the borrower or mortgagor has to meet stricter requirements.
- Amortizing Fixed-Rate Mortgage: Most fixed-rate mortgages are amortized. It means that the borrower starts paying off both the principal and interest amount in fixed monthly payments. Consequently, they start building equity from the first payment itself.
- Non-amortizing Fixed-Rate Mortgage: Although not very common, this mortgage involves a small monthly payment for the initial 5 to 7 years. But the downside is that in the end, the borrower has to make a lump sum balloon payment of the remaining amount which can be burdensome.
How to Get a Fixed-Rate Mortgage?
- Build Credit: You need to have a decent credit score and a history of timely payments. Work towards building your credit so that you become eligible to apply for mortgage.
- Determine Your Budget: Decide the amount you are willing to spend on a home purchase. Make sure you have adequate income to make the monthly payments. You also have to apply for a mortgage accordingly.
- Explore Mortgage Options: Check the different types of home loans available and their requirements. You can shortlist the ones you are eligible for. Get an approximate idea of the monthly payments you have to make for each of them.
- Compare Mortgage Rates: Home loans have different interest rates. Compare the overall interest that you will end up paying at the end of the loan term and decide which one fits your budget.
- Select a Mortgage Lender: There are private and government-approved mortgage lenders available. Choose a lender whose conditions for lending are flexible and the payments are amortized.
- Get Mortgage Pre-Approval: The first step of acquiring a mortgage is to apply for pre-approval first. Your mortgage lender can help you with the application process and meet the requirements.
- Keep Aside the Down Payment Amount: Whichever mortgage you opt for, you have to make a down payment of around 20% of your home’s value. You have to make space for that amount in your budget and keep it aside.
- Shortlist Properties Within Your Budget: The next step is to look for properties within your budget, either yourself or through an agent. Negotiate with the seller to get the best offer and ensure that the price is within your range.
- Apply for a Mortgage and Get Approval: After the deal is finalized, you can approach your lender to apply for the mortgage. With pre-approval this process is faster and you can get the mortgage easily.
- Purchase Your New Home: With the downpayment amount and mortgage in place, you can become the proud owner of your new home. An amortized fixed-rate mortgage can help you to build equity from the very first mortgage payment.
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Pros and Cons of Fixed-Rate Mortgage
✅ Pros
- Predictability: With a fixed-rate mortgage, you know exactly how much your monthly payment will be for the entire term of the loan. This makes budgeting and planning easier.
- Stability: The fixed interest rate protects you from market fluctuations thereby making your mortgage payments stable. You are not affected by any changes in the loan interest rates.
- Simplicity: The concept of a fixed-rate mortgage is very easy to figure out. It is a good option for first-time home buyers as there are no complex terms to understand and the payment system is simple.
❌Cons
- Higher Interest Rates: Fixed-rate does not mean lower interest payments. In fact, these loans generally have higher interest rates than adjustable-rate mortgages (ARMs). You pay extra to get stability and predictability.
- Limited Flexibility: A downside of fixed mortgage rates is that you cannot take advantage of a fall in interest rates. You have to keep paying the fixed interest for a fixed number of years which can be costlier and more time-consuming.
- Higher Upfront Costs: Fixed-rate mortgages typically require a larger down payment and have higher closing costs than ARMs. You have to pay these upfront so you need to keep aside an adequate amount to get the mortgage.
Fixed Rate Mortgages vs Adjustable-Rate Mortgages
An adjustable-rate mortgage has a fixed interest rate for the first few years of the loan term. After that, the interest rate is adjusted. It increases or decreases as per the market rates.
A fixed-rate mortgage is a good choice if you want stability, lower installments, and a fixed amortization schedule. However, you can lose out on a reduction in interest rates in the future.
On the other hand, an adjustable-rate mortgage is meant for you if you plan to sell the house within a few years, if you are sure of a dip in interest rates in the future, and if you want to pay lower interest than for a fixed-rate mortgage.
However, ARMs are riskier because the interest rates may rise and increase your monthly payments. Weigh the pros and cons and proceed accordingly.
⚡ Current Mortgage Rates for Different Home Loans
Here are the fixed and adjustable mortgage rates and the Annual Percentage Rate (interest plus broker fees and other charges) for the first week of July. Compare the rates to see which program suits you best. (Data Source: Zillow)
| Mortgage Type | Interest Rate | Annual Percentage Rate |
|---|---|---|
| 30-Year Fixed Rate Conventional | 6.58% | 6.65% |
| 20-Year Fixed-Rate Conventional | 6.34% | 6.43% |
| 15-Year Fixed Rate Conventional | 5.95% | 6.07% |
| 10-Year Fixed-Rate Conventional | 6.02% | 6.22% |
| 30-Year Fixed Rate FHA | 5.71% | 6.80% |
| 30-Year Fixed-Rate VA | 6.03% | 6.28% |
| 15-Year Fixed-Rate FHA | 5.55% | 6.73% |
| 15-Year Fixed-Rate VA | 5.87% | 6.32% |
| 30-Year Fixed-Rate Jumbo | 6.95% | 7.02% |
| 15-Year Fixed-Rate Jumbo | 6.64% | 6.74% |
| 7-Year ARM | 6.77% | 7.48% |
| 5-Year ARM | 6.53% | 7.52% |
| 7-Year ARM Jumbo | 6.99% | 7.54% |
| 5-Year ARM Jumbo | 6.78% | 7.59% |
Is a Fixed Rate Mortgage Right for You?
- Monthly Budget: With a fixed-rate mortgage, you can budget for your mortgage payment with confidence. It won’t fluctuate based on changes in interest rates.
- Long-term Plans: You can lock in a low-interest rate for the entire loan term. This ensures peace of mind and potentially saves you thousands of dollars in interest.
- Risk Tolerance: If your risk tolerance is low, a fixed-rate mortgage can give provide stability. You will know exactly how much you have to pay every month.
- Interest Rate Trends: If you believe that interest rates will rise in the future, go for a fixed-rate mortgage. Your interest rate will be locked in for the entire loan term.
Bottom Line
A fixed-rate mortgage is popular for so many reasons- stability, predictability, and simplicity. Home buyers can avail of this option to amortize loan payments and make them affordable.
However, the total interest you end up paying depends on the loan term. Also, be prepared to pay higher interest rates than most other mortgage types. Stability comes at a cost after all.
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Frequently Asked Questions
1. What is the mortgage interest rate today?
If you want to check the latest mortgage interest rates for different loan terms and types, refer to a government website like Freddie Mac.
2. When will the interest rates go down?
The interest rates are likely to see a downward trend till the end of 2023 and the beginning of the next year according to a NAR report.
3. What are the 30-year mortgage rates?
The recent mortgage rate for 30-year fixed-interest loans is around 6.58% . The rate can vary for different mortgage lenders.
