We will be focusing on the 30-year fixed mortgage rates, but before we dive into that, we feel you should know the basics. So, what is a mortgage?
What is a mortgage?
A mortgage is a loan issued by a bank or other lender for the purchase price of a property, such as a house or a condo. The property purchased with the money then guarantees repayment of the loan balance through a lien on the deed. Once you’ve agreed to the terms of your fixed-rate loan, you will begin to make regular monthly payments until the debt is paid off.
A mortgage loan balance is not merely the initial principle payment for your home, but also interest charged on the loan, home-owners insurance, mortgage insurance, and taxes. For that reason, though the interest rate is essential when considering the type of mortgage to go for, you should also factor in the annual percentage rate. It is a broader percentage that covers not just the interest, but other costs involved with the process, including the escrow fees. А bank account held by the lender that is used to pay off the mortgage insurance and property taxes is called an escrow.
Though mortgages are often associated with purchasing property, they are strictly speaking any loan issued with the property as collateral. If you have outstanding debts or wish to perform renovations, then taking out a mortgage may make sense. Having a mortgage on any property will usually require that you carry homeowner’s insurance, which is another cost that can add to the total amount that has to be paid back.
According to the Mortgage Bankers Association (or MBA’s) most recent campaign, the mortgage industry is more transparent and safer than it has been before. Therefore, there has never been a better time to invest in a home. We want to provide you with the information to ensure that that is actually the case.
What are 30-year fixed mortgage rates?
Since we have already covered what the basics of a mortgage are, it is now time to take a more in-depth look at the 30-year fixed-rate loan.
A 30-year fixed-rate mortgage is a type of mortgage loan that is issued assuming that it will be paid back within 30 years at a fixed interest rate. The interest rate offered can vary over time and from loan to loan but remains the same once you have signed for your loan. Fixed-rate home loans are not the only available mortgage products available. Some mortgage loans, such as adjustable-rate mortgages or ARMs, do not follow this principle, and you may find yourself with surprise costs if the interest rate rises.
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Example of 30-Year Fixed Mortgage
As an example, let’s say you have found your dream home selling for $300,000, and then commit to a 3.75% interest rate on a 30-year fixed-rate mortgage. When considering only the principal payment and the interest, you could expect to pay around $1,150 a month. With an adjustable-rate mortgage, you could commit to a 3% interest rate, which sounds like a great deal but one that may change over time. ARMs do offer an initial fixed-rate period, which can vary from 3-10 years. This option may work for you if you are looking for a loan and are confident in your ability to pay it back before that period expires.
If the risk of an ARM is concerning, then now is one of the best times to get into a 30-year mortgage. Mortgages rates can fall, and right now they are at the lowest they have been for some time. The above rate of 3.75% is an actual example of today’s offerings (subject to your credit score) that you could expect from a lender. However, mortgage rates are expected to rise again at the end of 2019.
Short-Term vs. Long-Term Loans
A 30-year fixed rate is not the only fixed-rate term available. Shorter-term loans of 20 years and 15 years are also available.
Both long term and short-term loans come with their advantages and disadvantages.
A shorter-term loan comes with higher payments but lower mortgage interest rates. Short-term mortgages may be more appropriate than the 30-year ones if you don’t plan on keeping your real estate purchase for the long term. You might also prefer these terms because mortgage payments are expensive, and you may want to pay off your loan as soon as possible to save money in the long run.
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Remember These Facts
On the other hand, the longer-term loan rates will have lower monthly payments but a higher interest rate. Another benefit of the long-term loan is that, despite the fixed interest rate, you are allowed to increase the amount that you can pay monthly. The lower monthly payments with a 30-year loan will leave more room in your budget, which you could invest in the property or use to pay off other outstanding debts. However, those savings can also be used to pay off the loan faster.
If you find yourself with cash to spare, then you can put it towards your loan on top of your monthly payments, ultimately reducing the duration of the loan. Just be sure to check the terms of your particular loan, as some lenders do charge an early repayment fee. With any loan, you should consider not just the monthly payments but also the total of payments in the long-term.
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Getting the Best Deal on Your Loan
So, you have decided that a 30-year fixed mortgage is for you. You don’t want to deal with the higher payments that come with a shorter-term mortgage, nor the unpredictability of an adjustable-rate mortgage. Keep in mind that due to the higher interest rate, you will have to pay out more in the long run. Fortunately, we can help you lower that amount by giving you some tips to consider before signing your loan agreement:
The key to getting the best interest rate is your credit score, with the most popular version being the FICO score. Your interest rate is partially set based on the risk the lender is taking when the loan is issued. A high FICO credit score indicates that you are a responsible borrower. Paying bills on time, avoiding the need for debt collection and generally keeping outstanding debt low are all ways to improve your score.
As an example, on a 30 year fixed mortgage for $200,000 with a credit score of around 630, you can expect an APR of 5.77% with monthly payments at $1170. A credit score around 760 to 850 could secure you a 4.18% rate APR with monthly payments at $976. This means that you could save up to $70000 on your mortgage with a higher score. Start improving your credit score now!
Following these tips will not only increase your credit score but may allow you to save money on your origination fee. An origination fee is paid to the lender for processing your application. These fees are negotiable and usually, cost between 0.5% and 1% of mortgage loans. You will have more power to negotiate the fee amount with better credit.
In addition to your credit score, you should also pay attention to your LTV or loan-to-value ratio. Higher down payment will increase your equity in the property. Buyer’s equity is the amount of the mortgage that you have paid off plus your down payment, as opposed to what you still owe, which would be the lenders’ equity. Your LTV would then be at a lower ratio, and thus reduce the amount of money you need to pay back. An additional benefit to higher down payment is the possibility of not needing to pay for mortgage insurance. If you can pay over 20% of the principle house price, then you can avoid this insurance altogether.
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Another way to save on your loan fees is to avoid a conventional mortgage or a loan issued by a private financial institution, altogether. Conventional mortgages come with higher mortgage interest rates when compared to a government-issued loan such as an FHA loan. This type of loan was designed for those with lower incomes and credit scores.
However, they are more restricted in more than just loan amounts compared to your standard mortgage. To qualify for an FHA loan, a lower minimum down payment is required. If that down payment is lower than 20% of the purchase price, you will have to pay monthly mortgage premiums on top of your regular mortgage payments. Another point to note that makes an FHA loan more restricted than a conventional loan would be that an FHA loan is only allowed for purchasing your primary residence. If you were looking to build a real estate investment portfolio, then this wouldn’t be an option for you.
Similar to an FHA loan in that it is issued by a government agency, in this case, the United States Department of Veterans Affairs. A VA loan is suitable for current and ex-service members, along with their surviving spouses. There is no insurance required, no down payment, and tax deductions are available. A lower interest rate is common with this type of loan. You can even apply for grants to help adapt a property to accommodate any permanent disability sustained during your service in the armed forces.
If a conventional mortgage is your only option, then it is in your interest to ensure that the lender is issuing a conforming loan. Conforming loans must adhere to set guidelines, with the most important criteria being the set loan limit. A conforming loan usually also comes with a lower interest rate than a non-conforming loan.
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Refinancing Your Home
Refinancing is the process of getting a new mortgage, ideally at a lower interest rate and lower monthly payments. Most people would begin considering refinance applications once they have paid off a large portion of their current mortgage and hold significant equity in their property. Often as you work through your career, you can make more money and then pay off outstanding bills, which in turn increases your credit score.
As we discussed, a better credit score can secure lower interest rates and save you money. This option does not come without risks, however. There are additional fees needed for the application, so always check the terms of your new agreement to ensure you are really getting a better deal.
Are 30-year fixed mortgage rates right for me?
A long-term mortgage is one of the most popular choices available from mortgage lenders, and for a good reason: The fixed interest rate provides predictability and control to the borrower that you may not find with alternative loans.
Lower monthly payments make it more affordable to borrow this way as opposed to the shorter-term mortgages available, meaning less commitment of money each month. Even if the monthly payment amounts of short-term loans are not of concern to you, a 30-year mortgage may allow you to afford a more expensive house than you had initially planned on.
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Always Consider the Future
You do, however, need to consider your future plans. For example, you may wish to retire in 15 years and would much prefer to have the mortgage debt paid off before reaching that benchmark. Before considering any mortgage, you need to ensure that you have a way to provide the fees necessary to afford it in the long run. Mortgages are a commitment that will take up a large portion of your life. That’s why if you can take advantage of any of the tips we have provided above to achieve a better rate, then so much the better for you.
Will you be taking on a 30-year fixed-rate mortgage to join the growing list of homebuyers? After exploring the mortgage market, would you prefer a short term or long term loan? How helpful was this page in answering your question?
Any of you with a loan already, please do share your experience and tips for the new homebuyers.