You have been dreaming of owning a home for years, and you are now ready to make a big investment. You have identified the right home, but one thing remains, getting a mortgage. If you have never acquired a mortgage before, you may feel confused as you evaluate the various mortgage options in the market.
At Money Lender Loans in Orange County, we offer the best mortgage services to make your home buying experience enjoyable. Our experienced mortgage officers will guide you through the various types of mortgages. They will evaluate your unique financial situation and guide you into choosing the right mortgage financing. In this article, we focus on Fixed-Rate Mortgages (FRM), features, and the mortgage application process.
An Overview of Fixed-Rate Mortgage
A Fixed-Rate Mortgage charges a constant interest rate throughout the loan period. The interest rates will not change even if major economic changes such as inflation occurs. The typical repayment period for mortgage loans is 15 or 30 years, but you can choose any period that you feel most comfortable with depending on the lender. For instance, if you want to pay for your home quickly, you would opt for a shorter repayment period.
The predictable repayment mode makes Fixed-Rate Mortgages popular as real estate investors can be able to budget accordingly. You will know the exact amount to set aside every month to cater for a mortgage payment. You will not be surprised by an unexpected increase in interest rates, which may raise your monthly mortgage repayments. Fixed-Rate Mortgages are easy to understand as they have universal features irrespective of the lender.
Even if the interest rates for Fixed-Rate Mortgages are fixed, the total interest paid depends on the term of the mortgage. For instance, a 30 -year mortgage will have a higher consolidated income than a 15 -year mortgage. A 30 -year mortgage is attractive as it has the lowest monthly payments. However, you will pay more interest by the time you complete the long repayment period. Shorter-term mortgages may have higher monthly payments, but the overall interest will be lower.
Fixed-Rate Mortgages in California
As of June 1, 2019, the current average mortgage rate for a 30-year Fixed-Rate Mortgage in California is 4.27%. For a 15-year Fixed-Rate Mortgage, the average interest rate is 3.75%. For the 5/1 Adjustable-Rate Mortgage (ARM), the average rate is 3.73%. Mortgage rates are not constant but rise and fall every week. It may be hard to know when it is right to take advantage of low-interest rates and apply for a Fixed-Rate Mortgage. With the guidance of a mortgage officer, you can take advantage of the best mortgage rates.
In 2019, mortgage rates in California and the rest of the country are likely to be stable according to forecasts. The Federal Reserve's Open Market Committee (FOMC) recently made an announcement confirming this. The committee outlined that it would adopt a data-dependent approach to future rate hikes. This may result in a slowdown from hikes witnessed in 2018.
The news of potentially stabilizing rates is a relief for California homebuyers. In times of predicted rising interest rates, buyers often have to rush and acquire a mortgage before the implementation of higher interest rates. However, with FOMC intention of monitoring the market before considering future interest hikes gives buyers time to shop for the right home and the right mortgage lender.
Determining the Interest Rate for a Fixed-Rate Mortgage
After applying for a Fixed-Rate Mortgage, the interest set during the application process prevails throughout the loan term. It is therefore important to understand the various factors that are taken into consideration while setting the interest rates of FRM. The factors include:
The Current Prevailing Interest Rates
The fixed interest rate applied to your mortgage depends on the prevailing market interest rates at the time you apply for the mortgage. If the interest rates are high, your rate will be high, and if the rates are low, you will have an added advantage. You will enjoy the low-interest rates for the entire loan period.
Personal Financial Situation
Your financial situation is closely examined at the time you are applying and signing the mortgage papers. For instance, your credit score will influence the interest rate for your mortgage. If you have a high credit score, you may enjoy lower interest rates. However, with a low credit score, lenders may set high-interest rates to cover the inherent risk. Other factors that determine the interest rate include the size of the mortgage you apply for and the repayment period.
When applying for a mortgage, you may choose to cover the closing costs or to have the lender cover the closing costs. You may request the lender to roll various costs into the interest rate, and this will raise the mortgage interest rates. This is a common arrangement between borrowers and lenders.
Private Mortgage Insurance
You may be willing to pay a higher interest rate to use lender paid mortgage insurance instead of seeking private mortgage insurance. Instead of paying for the mortgage insurance from your pocket, the lenders pay for you, and in turn, you pay a higher interest rate.
Benefits of a Fixed-Rate Mortgage
When compared with an adjustable rate mortgage, a Fixed-Rate Mortgage offers some benefits, which make it a popular choice for real estate investors. The benefits include:
Stable Interest Rates
Just like its name, interest rates for a Fixed-Rate Mortgage remain fixed for the entire period of the loan. The rates will not fluctuate. Even if the market interest rates for mortgage increases, your financial profile changes, or economic factors change, the rates for your mortgage will remain the same. As a borrower, you will enjoy some certainty throughout the life of your loan.
Constant Monthly Payments
Since the interest rate for a Fixed-Rate Mortgage does not change, the monthly installments will also not change over the life of the mortgage. With other mortgage options such as Adjustable-Rate Mortgage and interest-only mortgage, the monthly installment changes as economic conditions change. Borrowers with committed income may not be able to afford the mortgage payments that increase suddenly, for instance. For example, if your financial situation changes after you secure a mortgage, you may not be able to meet sudden increases in monthly mortgage installments. With a Fixed-Rate Mortgage, there is no risk of increasing monthly payments.
The Best Option When Interest Rates are Low
When interest rates are low, a Fixed-Rate Mortgage is an ideal real estate financing option. The low-interest rates improve the borrower's chances of qualifying for a mortgage. As a borrower, you will lock in a low-interest rate, and you will enjoy low monthly payments. Once you apply for a Fixed-Rate Mortgage when the interest rates are low, the low rates will prevail over the term of your mortgage.
Flexible Mortgage Term Options
Compared to other mortgage programs, a Fixed-Rate Mortgage offers flexible mortgage terms. Depending on the lender, you may either choose to pay your mortgage in ten years, fifteen years, twenty years, or thirty years. Some lenders may even offer a forty-year term although this is relatively rare. With several mortgage terms to choose from, you can select the term that best matches your financial goals. You may also select terms that enable you to pay optimal total interest.
Peace of Mind
The key benefit of a Fixed-Rate Mortgage is the peace of mind it offers. You can rest knowing that no matter the changes in the economy, your mortgage rate will not change. If you acquire a thirty-year mortgage, you can enjoy thirty years of certainty. If you do not enjoy risk and uncertainty, this is your ideal mortgage product.
Easier to Compare Loan Options
When investing in a Fixed-Rate Mortgage, you enjoy simplicity when comparing the various loan options. It is easy to compare Fixed-Rate Mortgages, as there are a few factors involved. You will only need to compare rates and the closing costs. This is not the case when shopping for an adjusted rate mortgage; besides comparing the closing costs, you would have to compare introductory interest, the length of the introductory period and the magnitude with which the rate can change over the mortgage term. With a Fixed-Rate Mortgage, you will have an easy and straightforward comparison, but with ARM, you may need guidance while shopping around.
The Cons of Fixed-Rate Mortgages
Although Fixed-Rate Mortgage offers a wide range of benefits, it also has a few cons. A mortgage is a long-term financing; if you make an error in choosing a mortgage program, you will suffer the consequences in the long run. Therefore, besides understanding the benefits of a mortgage program, it is crucial to understand the cons as well. This way, you can make a well-informed objective and choose a mortgage program that suits you best. The cons of Fixed-Rate Mortgage include:
No Lower Introductory Rate
Compared to an Adjustable-Rate Mortgage and interest-only mortgage, Fixed-Rate Mortgages tend to have a higher interest rate. Although the rate will not fluctuate, a higher interest rate at the time of application results in paying a higher total interest. A higher interest rate may also limit the amount of money you qualify for, and this may limit your investment.
Adjustable-Rate Mortgages offer a lower introductory rate for the first few years of the mortgage. Typically, the introductory rates may be for five, seven, or ten years.
Locked Into an Interest Rate
One advantage of a Fixed-Rate Mortgage is the unchanging interest rate. However, this factor may turn out to be a disadvantage. With adjustable rate or interest only mortgage, if the interest rates go down, the mortgage rates also go down. However, if you have a Fixed-Rate Mortgage, you will continue paying a higher interest irrespective of the lower market interest rates. You can only enjoy the lower interest rates if you decide to refinance your mortgage. Refinancing your mortgage may be both time consuming and expensive. If your financial profile changes due to income decline or a change in credit score, you may not be eligible to refinance. You would have to continue paying higher interest rates even when market rates are lower.
Hard to Customize
Fixed-Rate Mortgages do not offer personalized customization that comes with Adjustable-Rate Mortgages. Unlike ARMs, FRM loans tend to be identical from one lender to the other. With ARMs, you can arrange a unique payment plan with the lender of your choice.
What to Consider Before Choosing an FRM Loan
Before choosing an FRM over an ARM loan, it is important to evaluate several factors. This will prevent you from choosing a Fixed-Rate Mortgage, yet an Adjustable-Rate Mortgage would be a better option. Examining your unique situation will help you make a good choice. Some factors to consider include:
The Length of Stay in the New Home
It is crucial to consider how long you intend to stay in the home you are purchasing. If you plan to reside in the home for a long period, a Fixed-Rate Mortgage would be a better option. However, if you will only stay in your new home for several years, it would be wiser to go for ARM. With an ARM, you can take advantage of the lower introductory rate, which may last for five, seven, or ten years. This lower starting rate may be all the stability you need in your mortgage payment. For much longer periods, however, Fixed-Rate Mortgage would offer more stability.
Current Interest Rates
When weighing between FRM and ARM, you should consider the current interest rates. If the current rates are low, it would be more appropriate to invest in a Fixed-Rate Mortgage as the low rates will apply for the entire loan period. However, if the current interest rates are high, you should consider carefully and go for ARMs, as you will still have a chance of enjoying lower rates when the market interest rates drop.
Evaluate Your Financial Situation
When choosing between FRM and ARM, you should have your financial situation in mind. For instance, consider whether your financial condition can allow you to make some extra mortgage payments if need be. If you feel that your financial situation can allow for some extra payments, you may go for an ARM; even if the rates go high, you can comfortably make the additional payments. However, if you are working on a tight budget and you cannot accommodate unexpected financial obligations, you should go for FRM, as it is predictable and easy to budget for.
Getting Started with Fixed-Rate Mortgage Application
If you have finally decided that you need to become and homeowner and you have decided to go for a Fixed-Rate Mortgage, how do you get started? You will need to understand various factors that determine your eligibility and the necessary documentation. You will also need to understand all the costs that come with mortgages:
Understand All Expenses
There is more to a mortgage than just the principal and the interest. When you are planning to acquire a mortgage, consider the additional expenses:
Private Mortgage Insurance (PMI)- PMI is a requirement for most mortgage applications. The insurance shields the lender; if the borrower defaults the mortgage, the lender receives a reimbursement and does not incur charges. The PMI rates may vary depending on the type of mortgage loan you choose. For a Fixed-Rate Mortgage, you may arrange with the lender to incorporate the insurance fees into the mortgage, and this will raise the FRM interest rates. You may also opt to seek private mortgage insurance.
Other common expenses include property taxes, which depend on the city, and the state you live in. You may also need homeowners insurance, which will protect your home from any damages. It would be detrimental to acquire a home through a mortgage, only to lose it in unexpected conditions. If you are buying a home in a neighborhood that has a homeowners association, your expenses may include HOA fees.
Know Your Credit Score
Your credit score will not only determine the approval of your mortgage but will also influence the mortgage interest rates. Most mortgage lenders will have a minimum credit score, which you must meet to have your loan approved. Different credit scores may apply for different types of mortgages.
Have Your Documents Ready
Mortgage lenders will require some documents from you as you apply for a Fixed-Rate Mortgage. The lender will need to verify your income and your assets. Some documents that you may need to avail include bank statements, driver's license, tax returns, and other income details.
Getting pre-approved is the first step when applying for a mortgage, and it is different from getting pre-qualified. Pre-qualification means that you meet all the requirements necessary to apply for a mortgage but verification is yet to be conducted. Pre-approval means that the mortgages officer has pulled credit and verified your income documentation. In most cases, realtors will not show you available homes if you do not have a pre-approval letter.
Similarly, most sellers will not accept your offer if you do not have a pre-approval letter. However, the approval process is often brief and can be done on the phone. Your lender will issue a pre-approval letter outlining the amount of mortgage you can get.
Find a Trusted Real Estate Lender Near Me
If you are planning to acquire a real estate property in Orange County, you do not have to go in it alone. Our experienced mortgage officers at Money Lender Loans are willing to guide you into choosing the right mortgage program that suits your financial status. Our mortgage officers have an understanding of the mortgage process, and they are specialized in handling Fixed-Rate Mortgages. Call us at 949-409-4372 and start your journey to becoming a homeowner today!