The major advantage of having a fixed-rate mortgage is that the interest rate you pay remains constant throughout the term of the loan. You may have to pay a slightly higher interest rate than if you applied for an adjustable-rate mortgage, but you always know what your monthly payment will be. Fixed-rate mortgages are a bit less complicated than adjustable-rate mortgages, which can make it easier to shop for lender rates and terms.
Check FICO Credit Score
Check to see that your credit is up to snuff. Order a copy of your free annual credit report from each of the nation’s three major credit-reporting agencies – Equifax, Experian and TransUnion. While you're at it, request your credit score from AnnualCreditReport.com.
The better your credit history, the lower the interest rate you'll have to pay. If you need to improve your credit rating, focus on demonstrating to a lender that you're able to pay your bills on time. Paying off some debts is another way to qualify for better mortgage terms.
Consider Your Household Budget
Take a careful look at your current household budget. Use it to determine how much money you can afford to pay on a mortgage each month. Assemble all the financial information you'll need to provide the lender when you reach the point of completing a loan application.
As of 2019, income-to-debt ratio rules established by Fannie Mae (The Federal National Mortgage Association) require that your total monthly debt payments amount no more than 50 percent of your gross monthly income ( 36 to 45 percent for manually underwritten loans). In addition, lenders prefer that your monthly mortgage principal and interest payments, homeowner's insurance, and property taxes not exceed 28 percent of your gross monthly income.
Compare Interest Rates
Compare the interest rates and fees on fixed-rate mortgages offered by several different lenders. Consider the mortgage terms as well, including all the costs involved, when negotiating with lenders to find a deal that fits your budget. In some cases, you may find that getting the lowest interest rate might not be the best option available to you.
Keep in mind, too, that making a bigger down payment on the total purchase price of the home can get you a lower interest rate. Putting down 10 to 20 percent is the standard most lenders require, although an FHA loan does allow for a 3.5 percent down payment.
Compare Standard Loan Terms
Review the pros and cons of both a 15- and 30-year mortgage term. Although a longer term lowers the monthly payment, you pay back more in interest over the length of the loan. Another drawback is that during the early years of the loan, you are making low payments on the principal. A 15-year mortgage loan reduces the total you pay back in interest and allows you to build equity in the home faster and retire the loan sooner. However, it comes at the cost of increased monthly payments.
Consider Loans With Non-Traditional Terms
Ask about fixed-rate mortgages with non-traditional terms. Although many lenders offer 10-, 20- and 25-year mortgages, the interest rates aren’t usually as low as with traditional terms. Even if you determine that the payoff date for one of these loan terms may fit in with your financial plans, lenders typically don’t offer the same tempting interest rates – primarily because they can’t make money reselling the loan. Nonetheless, you might be able to work out an attractive deal by approaching a lender individually.
- When shopping for the best rates at the least cost, inquire about all the costs involved, in addition to the loan terms. In some cases, getting the lowest interest rate might not be the best option available to you. Understanding your mortgage options can help you make a better deal.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.