Q: What is a fixed rate mortgage? What makes it attractive?
A: A fixed rate mortgage has an interest rate that does not change during the life of your mortgage.
A favorable interest rate now will stay with you, even if rates in the market go up. With a 30-year mortgage, it is safe to assume that rates will increase at some point. Your fixed rate mortgage will protect you, though, because it will never change.
If rates go down, there is no reason to worry, you always can refinance your mortgage, essentially replacing it with a new mortgage at a better rate. As a result, a fixed rate mortgage is predictable while leaving open the possibility of getting a better rate later.
Q: What is a variable rate mortgage? When are they useful?
A: Variable rate mortgages have an interest rate that changes, based on interest rate changes in the market. If interest rates go up, the rate on your mortgage will go up, too.
Usually, variable rate mortgages come in the form of Adjustable Rate Mortgages (ARMs). You are given a fixed rate of interest for the first few years (usually three or five years). The fixed rate tends to be quite low. After those first few years, though, the interest rate becomes variable. One strategy is to use an ARM for the first few years then refinance into a fixed rate mortgage.
Q: Which is better?
A: It depends. Fixed rate mortgages are predictable. When you secure your mortgage, you know what your interest rate will be for the life of your loan; the interest rate will not change. Variable rate mortgages, on the other hand, often give lower interest rates up front, but after a period of time, the rate can change. If you plan to live in your home for only a few years before moving, a variable rate mortgage can give you a low, fixed rate for as long as you need it. But, if you plan to stay in your new home for a while, a fixed rate mortgage offers the predictability that will help you manage your finances more effectively.
Q: Should I make a down payment?
A: Making a down payment has two advantages. First, it lowers the total amount of your mortgage. Your home will cost less over time, because you will pay interest on a smaller loan amount. Also, making a down payment can help get you a lower interest rate, which also saves you money for as long as you are in your home. Make a down payment if possible, but don’t forget to factor other fees such as closing costs into the amount of money you have available for a down payment.
Q: What is a debt-to-income ratio?
A: Your debt-to-income ratio is the amount of money you owe versus how much money you make. Your car payment, credit card balances, and other loans contribute to your debt-to-income ratio. This ratio is used to determine how much of a mortgage you really can afford.
Q: How can I get a better interest rate?
A: There are a number of things you can do to get a better interest rate on your mortgage:
- Make a down payment – it shows financial stability and reduces the amount of money you have to borrow
- Have a savings – if you have more than $20,000 in liquid assets (even if you plan to use that money for the down payment and closing costs), it shows financial stability
- Get rid of your credit cards – even if your credit cards have small or no balances, banks consider credit card maximums when calculating your debt
- Manage your debt – your debt-to-income ratio; don’t take on unnecessary debt
Our mortgage professionals are prepared to answer any additional questions you may have. Click hereto contact us for more information.
