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Understanding the 30-Year Fixed-Rate Mortgage Loan

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Government-backed. Conventional. Conforming. ARM. There are so many terms representing so many different loan options that it can be hard to keep them all straight — or learn enough to make an informed decision when it comes to finding the right mortgage. Most people are aware of the 30-year fixed rate mortgage loan (FRM), and for good reason. It’s the most common loan, in large part because of its favorable overall terms along the path to homeownership.

“A 30-year fixed rate mortgage product will work for the vast majority,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. He said it’s the most popular loan, but you’ll need to consider your particular circumstances to know whether it’s right for you. “It’s really about understanding your own individual goals and your housing budget to find the loan that fits into that budget comfortably.”

What is a 30-year fixed-rate mortgage?

A 30-year FRM is structured for a 30-year term with an interest rate that does not change over the life of the loan. Stretching the loan amount over 30 years makes monthly payments easier to afford. That long-term affordability is a strong draw for those who may not otherwise be able to purchase a home.

Interest rates for 30-year FRMs may be higher than some government-backed loans, and are dependent on factors including the individual lender and the borrower’s financial picture.

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Why is it so popular?

Most people don’t have an extra $253,600 — the median price of a U.S. home, according to the most recent data from the National Association of Realtors (NAR). Paying cash could leave them without sufficient money for daily living or as a cushion for emergencies.

Most buyers choose to finance their home, and 30-year fixed rate mortgages are their loan of choice. Seven out of 10 applicants opted for a 30-year FRM in 2014, according to the U.S. Department of Labor. Estimations are as high as nine out of 10 today.

Benefits of the FRM

Aside from the relative affordability of the monthly payments, the 30-year FRM offers additional advantages:

  • Fixed principal and interest payments that stay the same for the life of the loan eliminate the surprises that can come with adjustable rate loans.
  • You may be able to refinance to take advantage of interest rate drops or to take cash out penalty-free once your home has appreciated.

Drawbacks of the FRM

For all its advantages, the 30-year FRM does have its downsides. A longer loan period means you’ll pay more over the life of the loan than you would on a mortgage with a shorter term.

30-Year Fixed-Rate Mortgage vs. 15-Year Fixed-Rate Mortgage Comparison

For a $253,600 loan (median U.S. home price)

 Interest RateMonthly Payment (Principal and Interest)Interest PaidTotal Paid
30 Year Fixed4.250%$1,247.56$195,521.44$449,121.44
15 Year Fixed3.625%$1,828.55$75,538.86$329,138.86

As you can see from the above table, using current rates for 30-year and 15-year FRMs, you can save a tremendous amount of money over the life of the loan with a 15-year fixed-rate mortgage as compared to a 30-year term. You’ll also build equity faster.

However, monthly payments for this loan are also significantly higher. As an alternative, you can opt for a 30-year mortgage and make extra principal payments to get your loan paid off sooner — as long as the loan does not have a prepayment penalty. You won’t be obligated to make these payments monthly, so you can make them as you’re able and conserve funds when you need to.

Additional disadvantages include:

  • While a fixed interest rate means stable principal and interest payments, taxes and insurance can still change, so borrowers still have some uncertainty.
  • Refinancing may have its advantages, but borrowers will typically incur fees and closing costs.
  • You miss out on the introductory or “teaser” rate offered by an adjustable loan. These initial rates can save you a lot of money if you’re prepared to adjust before the rate does (more on this below).
  • Qualifying for a 30-year conventional FRM may also be more difficult than qualifying for government-backed loans, depending on the lender. Loans from the FHA and VA typically offer more leniency when it comes to credit scores and income requirements.

Alternatives to the FRM

Weighing loan options when buying a home is always a smart idea. There are several alternatives to the 30-year FRM, most notably adjustable-rate mortgages (ARMs) and 15-year fixed-rate loans.

Fixed-rate loans, regardless of the length of the term, are historically chosen by 70-75% of buyers, with the 30-year term being the most popular. The 15-year loan’s lower interest rate can save you tens or even hundreds of thousands of dollars, as the chart above shows. Today’s interest rate for a 15-year FRM is 3.9%, compared to the 4.45% 30-year FRM interest rate.

The ARM’s low introductory rate makes it a good option for homebuyers who only intend to be in their home for a few years, but the loan can pose dangers to those who don’t pay attention to rates or don’t want to trade lower rates now for future instability. While rate caps on ARMs provide some protection against wild rate swings, homeowners with an ARM may be shocked by the change in their payment when their rate adjusts for the first time, and again when it continues to adjust on an periodic basis. You may also have a prepayment penalty on an ARM.

How to apply for a 30-year FRM

As with any mortgage, it’s a good idea to check your credit before applying for a loan. Especially because 30-year FRMs tend to have higher credit requirements than government-backed loans, you’ll want to make sure your credit score is in a good range and that there are no inaccuracies on your credit report.

The minimum credit score for a 30-year FRM is generally 620, though some lenders may have higher standards. You should consult with several lenders when applying for a loan. Not only do requirements vary, but some lenders may have access to programs with better rates or terms.

Lenders will also consider your debt-to-income ratio (DTI). The maximum allowed is typically 45%, although lenders may allow the DTI to go to 50% for higher credit scores. In addition, you’ll usually have to furnish proof of at least two years of employment income and undergo an employment history review.

It’s also important to remember that monthly payments are impacted by the down payment amount. While 20% remains a benchmark on 30-year FRMs (down payments less than 20% require private mortgage insurance [PMI]), lower down payments are possible. In fact, according to the latest numbers from ATTOM Data Solutions, the median down payment for homes purchased across the country is just 6.6%.

Loans from the Federal Housing Authority have a minimum down payment requirement of 3.5% for qualified buyers, while other programs from Freddie Mac and Fannie Mae offer low- and moderate-income homebuyers the option of putting only 3% down. The tradeoff for those lower rates is PMI, which ranges from 0.45% to 1.05% of the loan amount and can add hundreds of dollars to your monthly housing commitment.

Conclusion

The 30-year fixed-rate mortgage offers several distinct advantages for homebuyers. It certainly has history on its side. If you’re looking for maximum stability and minimum monthly payments, and you meet the credit and income requirements, the 30-year FRM may be a smart choice.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jaymi Naciri
Jaymi Naciri |

Jaymi Naciri is a writer at MagnifyMoney. You can email Jaymi here

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How to Use an FHA Title 1 Loan for Home Renovations

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Dreaming of a fixer-upper that you can take from a diamond in the rough to a gleaming, updated gem? Maybe you’re searching for a way to make updates to your new home without waiting for the equity growth needed for a home equity loan. Or, perhaps you’re a hopeful homebuyer who needs to look outside the move-in-ready box to buy a home. (After all, according to U.S. property database curator, ATTOM Data Solutions’ Q4 2018 U.S. Home Affordability Report, the median home price nationally was at its least affordable level in more than a decade.)

While prices have been rising, remodeling activity in owner-occupied homes has been surging — up 7.5% in 2018, according to the Leading Indicator of Remodeling Activity (LIRA) report from the Remodeling Futures Program at the Joint Center for Housing Studies of Harvard University. And while the center predicts a decrease in annual growth in the national home improvement and repair market to 5.1% in 2019 — a figure that matches the average annual gain historically — spending is expected to rise to more than $350 billion.

But securing those renovation funds can be difficult, especially for people who can’t turn their home appreciation into cash-in-hand. What’s a homeowner to do if they don’t have equity in their home but still want to renovate? The FHA Title 1 loan may be option — for those who are aware of it.

“What I have noticed is very few people know what an FHA Title 1 loan is; as a matter of fact, many people have never even heard of it, even in the industry,” said Dallas-based Kevin Pierce, sales manager/senior loan originator at Cardinal Financial Co. “One of the main benefits to this loan, unlike a home equity line of credit (HELOC), is you don’t need equity in your home. This allows you to get a Title 1 loan without having to qualify with 80% loan-to-value [LTV] or 20-30% equity in the house you own.”

Intended for minor to moderate repairs and rehabilitation, the Title 1 loan can be used for single-family and multi-family properties, manufactured homes, nonresidential structures, fire safety equipment and also to preserve a historic home. Borrowers can either be property owners in the process of purchasing a property or have a long-term lease.

They don’t have carte blanche to use the funds however they see fit, though. The U.S. Department of Housing and Urban Development (HUD) mandates that, “Improvements must substantially protect or improve the basic livability or utility of the property.” That means luxury items like swimming pools, hot tubs and outdoor fireplaces are not allowed. A few ways HUD allows the funds to be used are to replace appliances, increase energy efficiency or make the home more accommodating for disabled persons.

Borrowers also don’t have unlimited funds to use. The Title 1 loan is capped at $25,000 for a one-unit, single-family structure; there are different maximum loan amounts for manufactured homes, multifamily properties and non-residential structures. “The maximum loan limit is $12,000 per unit up to $60,000 for multifamily units,” said Pierce.

But borrowers may have an incentive to go lower. Loan amounts up to $7,500 are unsecured, meaning you don’t need any collateral such as a deed of trust or mortgage. “If the loan exceeds $7,500, it must be secured by your home,” added Pierce.

Title 1 loans offer fixed rates determined by the lender with terms that vary depending on the type of structure:

  • Single-family and multifamily structures = 20-year loan
  • Manufactured home (with a foundation) = 15-year loan
  • Mobile home = 12-year loan

There’s no penalty for paying the loan off early, and HUD doesn’t mandate whether improvements are made by the borrower or a contractor. Funds can also cover materials, permits, any costs related to architectural or engineering work, appraisals and inspections.

Let’s take a look at some of the other details of the loan.

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FHA Title 1 loan requirements

What makes the Title 1 loan so attractive to borrowers is the fact that they don’t need to use the equity in their home — or even have equity in their home — to qualify. But there are other factors used to measure creditworthiness:

Occupancy Limits — Applicants must have occupied the home or manufactured home for at least 90 days. Any nonresidential structure being improved must have been completed before the borrower applies for the loan.
Credit Score — This loan is backed by the government but serviced by Federal Housing Authority (FHA)-approved lenders. HUD requires no minimum credit score, although lenders may apply their own minimums. Interest rates are also determined by the lender. Applicants can expect lenders to run their credit history to check for delinquencies or default judgments on government loans, as well as check employment history.
Income Requirements — There are no minimum income requirements from HUD.
Debt-to-income (DTI) — The maximum DTI is 45%. That means fixed expenses, housing costs, credit cards, car payments and any other outstanding debt cannot exceed 45% of your pretax income.

Benefits of using an FHA Title 1 loan for home improvements

While long-term equity gains are often a product of rising prices, one of the fastest ways to improve a home’s equity is to make property improvements. Home equity nationwide is currently sitting at $15,361, according to the most recent numbers from the Federal Reserve Bank of St. Louis — a number that has been steadily rising since 2011 and is forecast to increase another 4.3% in 2019 and 2.9% in 2020.

Other advantages of the Title 1 loan include:

  • Low fixed-rates that can keep payments lower than HELOCs and help avoid credit card interest and fees while also providing stability with predictable payments.
  • Can be used in conjunction with a 203(k) loan, an FHA loan that combines a first mortgage with renovation funds. Adding funds from a Title 1 loan can be a solution for covering unexpected renovation costs, completing planned projects (or adding more) and increasing flexibility because the 203(k) has somewhat stricter requirements and terms.
  • Changes to make a home more energy-efficient are covered under the loan and may not only result in modern updates, but also make a home more comfortable and lower utility costs.
  • It’s an easy way to fund fire safety improvements or to increase access in the home for those with disabilities. For instance, proceeds may be used to widen doorways or install wheelchair ramps.

How to apply for an FHA Title 1 Loan

Property owners can apply for the Title 1 loan through any FHA-approved lender, which will begin the approval process by accessing the borrower’s credit report. It also will verify employment and calculate your DTI ratio to determine if you meet the criteria for the loan. Borrowers can prepare for the application process by locating their last two years of W-2 forms and pay stubs, which are typically required for an FHA loan. Current bank statements may also be required.

Borrowers will also want to be aware that mortgage insurance is required on the Title 1 loan. The total premium is equal to 1% of the loan and can be paid upfront or rolled into the loan.

Conclusion

An FHA Title 1 loan can be a great option for those seeking a creative solution for buying a more affordable home and fixing it up or making necessary improvements with limited cash on hand or accessible home equity. Especially when used in conjunction with a 203(k) loan, borrowers may be able to increase the value of their home and earn equity that can pay them back when they go to sell, while creating a more livable home in the meantime.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jaymi Naciri
Jaymi Naciri |

Jaymi Naciri is a writer at MagnifyMoney. You can email Jaymi here

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Pros and Cons of Refinancing an ARM to a Fixed-Rate Mortgage

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Should you go with an adjustable-rate mortgage, or ARM, for a lower initial interest rate or a fixed-rate mortgage for long-term security? That’s a question many ponder when buying a home. But for those who already have an ARM that may be adjusting soon, rising rates may trigger the need to explore a fixed-rate refinance option.ARMs are different from fixed-rate mortgages in that they offer a low initial, or “teaser,” interest rate for a period of time — typically three, five, seven or 10 years — that then adjusts to the current rate. Rates for ARMs are typically lower than fixed-rate loans, making them attractive to a range of borrowers, such as first-time buyers who need a lower rate to be able to purchase; borrowers who intend to live in their home for only a few years and to sell before their rate adjusts; and those who may be able to safely predict future salary increases to cover what likely amounts to a higher rate later on.

Mortgage rates are expected to rise throughout the next year, and that uncertainty may bring a desire for a little control. Freddie Mac has forecast 30-year fixed loans to climb above 5% in 2019 — a figure we haven’t seen since 2011 — and the Federal Reserve’s announcement that benchmark interest rates will go up again this year has those homeowners whose ARMs are adjusting soon taking note.

Advantages of refinancing from an ARM to a fixed-rate mortgage

A fixed-rate loan offers several benefits to borrowers and may be especially prudent for those who are looking for a more conservative option than their ARM.

Reduce interest rate risk. Yes, ARMs offer a low initial rate, but once they adjust, borrowers can be in for an unpleasant surprise. In fact, Fannie Mae has a specific policy designed to protect buyers from what it calls “payment shock — the impact on the borrower’s ability to continue making the mortgage payments once the introductory rate expires” by qualifying buyers not just on their payment during the introductory rate, but on an amount that better predicts the post-adjustment payment.

Allows you to create a stable budget. One of the advantages of knowing what your mortgage payment is going to be every month is that it allows you to create a long-term budget and financial plan. Budgeting is difficult enough if you don’t know your firm costs, and only estimating what your most significant expense will be can keep you from creating a stable budget and setting goals. Having a solid budget also allows you to be better prepared for surprises and emergencies.

“An ARM is adjustable, which means the rate can go up,” said Tendayi Kapfidze, chief economist at LendingTree, which owns MagnifyMoney. “With a fixed-rate mortgage, you know what the rate is going to be. You know what your payment is going to be. It’s not going to change.”

People who are planners also may have interest-rate anxiety if their rate is adjustable. All the “what ifs” related to potential future rate increases can be hard to endure. If your adjustment period is still far away and you’re already starting to panic, it may be a good time to review your options.

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Potentially lower your interest rate

While there is the possibility that your interest rate will rise initially when you transition from an ARM to a fixed-rate loan, the advantage is in escaping the possibility of significant financial harm down the line. For many people, the jump from their current rate to the adjusted rate would be enough to hamper their finances. Not only is a fixed rate less risky, but it can also offer long-term savings by avoiding adjustments.

Of course, rates on ARMs can’t increase boundlessly; limits are in place that govern both annual increases and those over the life of the loan. For instance, on Federal Housing Administration one- and three-year ARMs, the rates can go up by 1 percentage point each year after the expiration of the initial rate period, and no more than 5 over the entire loan. But, even a 1-point increase can be enough to create affordability issues for those who are already financially stretched.

Downsides to refinancing your ARM

While there are many advantages to refinancing out of an ARM, doing so is not for everyone. If you tend to be more aggressive financially or are willing to take a gamble on rates staying stable, you may want to ride out your ARM until the last possible moment — and may even want to look into refinancing to another ARM at that point (more on that later).

For those who opt not to refinance at all, that decision is often due to a few potential drawbacks.

Upfront costs. As with almost any refinance, consider the fees involved because they can lower the cost benefit. You can expect to pay between 2% to 6% of the total amount you’re borrowing in closing costs. This covers things like application and origination fees, title insurance and inspection fees. You will most likely also need to pay for an appraisal, so the lender can determine the exact value of your home today. Total costs will vary, depending on where you live, and also can be different lender to lender, which might help you choose one over the other.

Interest-rate changes could be negligible. There are widespread predictions about interest rates rising in 2019, but, for now, they’re just predictions. “Some people play a game of predicting where they think rates are going to go, but I wouldn’t advise that,” Kapfidze said. “People on Wall Street are doing that every day. It’s about your personal risk profile and how comfortable you feel with interest-rate risk.”

A higher monthly payment. Borrowers who choose adjustable-rate loans often do so for the lower interest rate and lower payment, so the idea of a higher payment after switching to a fixed-rate mortgage won’t thrill them. But is the peace of mind of a fixed payment worth the higher amount? “Initially, the payment on a fixed loan may be higher than on an ARM, but, again, you’re eliminating the risk of your payment changing going forward,” Kapfidze said.

Breaking even. If you’re several years into paying your mortgage, you may not relish the idea of going backward. You can calculate your break-even time — the amount of time it will take to recover from the cost of refinancing — to help you decide whether this type of refinancing is a smart decision.

Refinancing to another adjustable-rate mortgage

The reasons you opted to go with an ARM — greater purchasing power with a lower rate, not planning to stay in the house long — might still be in play. In that case, it may make sense to refinance your soon-to-adjust loan to another ARM.

The most recent data from Freddie Mac shows 30-year fixed mortgage rates at 4.45% and a 5/1 ARM at 3.83%. An ARM could save you a considerable amount of money, but in a few years, you may find yourself in the same position again, looking to refinance into a more stable loan with fixed payment for a longer term. And there’s no telling what could happen to rates in the meantime.

Conclusion

Take your chances, or take control of your finances and your future in an uncertain time? For many, that’s the question posed by their adjustable mortgage. With a number of options for refinancing, from an ARM to a fixed-rate loan or to another ARM, buyers have a number of factors to consider, not the least of which is whether they want to refinance at all.

This article contains links to LendingTree, our parent company.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Jaymi Naciri
Jaymi Naciri |

Jaymi Naciri is a writer at MagnifyMoney. You can email Jaymi here

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