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 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 (see Resources). 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.
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. Kiplinger reports that income-to-debt ratios established by Fannie Mae (The Federal National Mortgage Association) require that monthly mortgage principal and interest payments, homeowner's insurance, and property taxes must not exceed 28 percent of your gross monthly income. A second requirement limits total monthly debt payments to no more than 36 percent of your gross monthly income. Some exceptions may apply, as in certain cases lenders may stretch the maximum total debt they allow to 45 percent.
Compare the interest rates and fees on fixed-rate mortgages offered by several different lenders. Consider the mortgage terms as well, when negotiating with lenders to find a deal that fits your budget. 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.
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.
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.
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