Types of fixed-rate mortgages
Just as vanilla ice cream offers different styles such as French, golden and vanilla bean, fixed-rate home loans come in different varieties as well. Some are primarily used for buying a home; others are popular for refinancing. Some are designed for borrowers who want to minimize their down payment, some work better for borrowers with lower credit scores.
Take the various loan terms (time it takes to repay) described above. Someone looking to buy a home would likely be most interested in checking out 30-year fixed mortgage rates, because they’d likely want to minimize their monthly payments in order to make their new home as affordable as possible.
But someone who’s looking to refinance a 30-year mortgage they’ve been paying down for several years may be more interested in a 20- or 15-year fixed-rate mortgage to more closely match the time remaining on their loan. Because 15-year fixed mortgage rates tend to be significantly lower than 30-year rates, you can often shave a few extra years off your remaining loan term with a 15-year refinance without increasing your monthly payment.
Fixed-rate FHA mortgages are often a good choice for borrowers seeking to minimize their down payment or who have lower credit scores. FHA loans allow down payments as small as 3.5 percent and are often less costly for borrowers with credit scores in the 600s (the FHA backs adjustable-rate mortgages as well).
Most U.S. mortgages are backed by either Fannie Mae or Freddie Mac. These usually offer the best 10- to 30-year fixed mortgage rates for borrowers with good credit scores.
If you’re a veteran or active duty member of the armed forces, a VA loan is likely your best choice for a home loan. For those eligible, 30-year fixed VA mortgage rates are some of the best on the market, coupled with the fact that no down payment is required in most cases.
If you’re looking for a high-end home, you may have to opt for a jumbo loan, which allows you to exceed the borrowing limits on conventional mortgages. Jumbo loans traditionally have been ARMs, but there are lenders who offer fixed-rate jumbos. Mortgage rates on jumbo loans typically run slightly higher than on conventional mortgages.
Fixed-rate loan versus an ARM
As noted above, the alternative to a fixed-rate mortgage loan is an adjustable-rate mortgage, or ARM. The main advantage of fixed-rate home loans is predictability – you know what your interest rate and mortgage payments will be for the life of the loan.
A fixed-rate loan is a particularly good choice when mortgage rates are low, such as they currently are. Even if mortgage rates move higher back toward historic norms, you’ve still got today’s low rates locked in. That also makes them a good choice for borrowers who plan to make the home their permanent dwelling.
Even so, don’t automatically dismiss ARMs. Most ARMs start out with a fixed rate over the first 1-10 years before the rate starts to adjust. That makes them an excellent choice for borrowers who don’t plan to stay in the home a long time. Since initial rates on ARMs are lower than on fixed-rate loans, a borrower who expects to move in 5-7 years can get an ARM where the initial rate is fixed for at least that long and shave perhaps half a percent off 30-yr fixed mortgage rates.
ARMs also provide versatility, as they’re sometimes combined with other features to make them more flexible, such as balloon payments, interest-only phases, negative amortization and the like. However, such options are best suited for financially sophisticated borrowers as they can present significant hazards for the unwary, as happened during the housing bubble.