Fixed Rate Mortgage Loan

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A home purchase is likely the largest item that you will ever purchase in your life and fiscal care is needed when doing so in order to maximize the benefits for you and to limit the risk that you are taking when you purchase a home. As most people will finance a home with a fixed rate mortgage loan, this article will provide some practical advice for what a person should consider when they are entering into a mortgage and ways to avoid common pitfalls.

The first consideration before entering into a mortgage is the amount of the mortgage you can take, and subsequently the size of the home you can afford. Most pieces of advice concentrate on 20% as the minimum down payment you should make and there is plenty of support for this figure. If you borrow more than 80% of the home price you will have to purchase prime mortgage insurance (PMI) which provides no real benefit to you and simply protects the lender from your default. PMI can be avoided with a 20% down payment. However, that is not the only consideration that should be made when deciding on the amount that you can borrow. How well you can cover the mortgage payment with your income is also a consideration. A common metric is 2.5 times your gross income in that you should not borrow more than this amount in order to be able to comfortably make your mortgage payments.

Next, the type of mortgage that you enter into should be considered. The two basic types available are fixed-rate mortgage loan options and variable rate options. A fixed-rate mortgage loan has a defined interest rate when you enter into the loan that does not change in accordance with prevailing interest rates. In effect, you lock in that rate for the life of the loan. The alternative is a variable interest rate loan which has an interest rate that is typically initially lower but that typically increases as prevailing interest rates fluctuate. For most people looking to have the security of being able to plan their financial future, a fixed rate interest loan provides the best stability to plan your financial future effectively. If you have the financial flexibility, a shorter-term loan for a ten or fifteen-year period can provide the best savings and lowest interest rate for your needs.

Once you understand the size and type of mortgage that you are looking for you can plan on how you can get the best rate by using rate comparison websites to locate the lowest interest rate on a mortgage. Be sure to pay attention to more than just the interest rate as closing costs can vary widely between different vendors and can significantly impact the amount that you pay on your mortgage loan in total.

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