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Buying or refinancing a home can be so overwhelming. There are many different terms out there, and if we don’t work with them everyday, we don’t always understand what all the verbiage means.
If you’ve heard terms like “fixed-rate mortgage” that leave you raising your eyebrows or just nodding your head in agreement, don’t worry – you’re not alone. However, before you commit to anything like this, it’s good to know what you might be getting yourself into!
In this guide, we will share more details about what a fixed-rate mortgage is and what to expect. Direct Home Lending can help with any of your mortgage and home buying needs.
So, What IS a Fixed-Rate Mortgage?
The best place to start is with the basic definition. When you hear the term fixed-rate mortgage, it simply means the mortgage will have the same interest rate throughout the life of the loan.
So, if you close on a home next month and the designated interest rate is 5.6%, with a fixed-rate mortgage, that is the rate that will continue until you either pay off the loan or refinance at some point in the future.
“Fixed-rate” truly just means that your rate is fixed and there will be no surprises down the road.
Types of Fixed-Rate Mortgages
The term fixed-rate mortgage has a solid meaning. However, there are still several different types of loans that a homeowner could pursue under this umbrella. Programs like First-Time Homebuyers (FHA), United State Department of Agriculture (USDA), Veterans Programs (VA), and more all typically have fixed rates. Most of these have specific programs and may not have a ton of different selections.
In addition to specialty programs like these, there are also conventional loans and loans with varying terms. While the most common mortgage term is 30 years, there are other options that a buyer can choose, like:
There is also a mortgage known as a balloon note. This has a fixed rate for a set term and then at the end of that term, a remaining lump sum payment is due to close out the loan.
Will a Mortgage Payment Change?
This is the part where it can get really confusing. You might assume that your payment won’t change over the term of the loan. After all, when the mortgage is closed and you sign your paperwork, it breaks it down into steady payments for the next 30 years, or whatever your loan terms might be.
However, this does not mean your payments will never change. We know what you’re thinking: How does that work if the interest never changes?
A payment CAN be adjusted during the life of the loan but it’s not because of the interest. Each mortgage has what is called escrow built into it. Escrow is a calculation of what your insurance and taxes will be over the life of the loan.
The challenge here is that escrow is calculated based on an estimate. As time moves on, taxes and insurance can go up or the costs can change from year to year. While the formula tries to cover this some, it’s not foolproof. Each year, the lender will review escrow, run their calculations based on billing, and then determine if there may be a shortage.
If a shortage is found, they will offer you the option to pay the difference or have your payment adjusted. The same is true for an overage. In the event of an overage in the calculation, they often will send you a check for the difference.
On a fixed-rate mortgage, this should be the only time that your payment changes, unless there is a circumstance that leads to an adjustment of your loan. If that happens, you would be well aware and a part of the process.
Fixed-Rate Mortgage Vs. Adjustable-Rate Mortgage
A fixed-rate mortgage is the most common solution because you have clear expectations of what to expect over the life of your loan. However, there are times where an adjustable-rate mortgage could be a great deal or what you feel is your best solution.
So what’s the difference?
The terms really speak for themselves. We mentioned that a fixed-rate mortgage holds the same interest rate for the entirety of the loan, whether that is 10 years, 30 years, or something else.
An adjustable-rate mortgage is just the opposite. With this option, the rate can be adjusted. There are usually specific terms tied to adjusting the rate. For example, there might only be certain time periods the rate can be adjusted. Some adjustable-rate mortgages will have an initial frozen rate for a certain number of years and then allow the lender to review the rate annually or semi-annually after that.
Adjustable-rate mortgages also generally have a cap on just how much they can go up. The terms can get confusing. If you decide to use an adjustable-rate mortgage, make sure you understand the limitations and when adjustments can occur. Get to know the specifics so you can plan for those along the way. The lender does have to notify you when changes are made so you won’t be blindsided.
Choose the Solution that Fits from Direct Home Lending
While fixed-rate mortgages are the common choice, being aware of the options is important. Remember that even with a fixed-rate selection, there are still several different choices to work with.
Direct Home Lending can help guide you through the mortgage process and come up with a solution that works well for you.