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Mortgage

Should You Consider a 10-Year Fixed-Rate Mortgage?

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How long will it take to pay off your mortgage? This is a vital question to ask yourself before you enter a mortgage agreement with any lender. The term of a mortgage will have a direct impact on the total amount of the loan you eventually have to pay back, as well as the size of your monthly mortgage payments.

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Longer loan terms — such as the standard 30-year — generally offer lower monthly payments and higher interest rates than the shorter 15-year loan term. Those interest rates add up over the life of the loan, increasing the total amount you owe to your lender.

While most people select 15-year or 30-year mortgages, there is also the option for a 10-year fixed-rate mortgage. These shorter mortgages offer a variety of benefits for homeowners, as well as some drawbacks. Here’s what you need to know about 10-year fixed-rate mortgages.

What is a 10-year fixed-rate mortgage?

A 10-year fixed-rate mortgage is a loan that maintains the same interest rate and monthly payments over the course of 10 years. Often, 10-year fixed-rate mortgages are offered with lower lifetime interest rates. However, because the loan term is shorter, homebuyers who choose a fixed-rate mortgage should also expect to make higher payments each month.

A range of lenders offer the 10-year fixed-rate mortgage as an option during the homebuying process. These are usually the shortest term available for a home loan.

Advantages of 10-year fixed-rate mortgage

There are many benefits of choosing a 10-year fixed-rate mortgage over longer options.

Lower interest rates
The interest rate on a 10-year fixed-rate mortgage is usually lower than the interest rates on 30-year fixed rate mortgage. When you have a lower interest rate, that means more of your monthly payments go toward paying down the principal of the loan, rather than chipping away at the interest as it accrues.
Pay off the loan more quickly
If you sign up for a 10-year loan rather than a 30-year loan, you’re agreeing to pay off the total sum of the loan over a significantly shorter amount of time. This means paying less interest over time and ending monthly mortgage payments decades earlier than with other loans.Even if we say the 10-year and 30-year loans offer the same interest rate (5%), the total interest you’ll pay on a 10-year term is $40,918. For a 30-year mortgage, it’s more than triple that amount: $139,884. For a 15-year loan it’s $63,514.

Build equity
By paying off a mortgage more quickly with a 10-year fixed-rate mortgage, you can build home equity more quickly than you would with a longer term loan. Home equity is the difference between the market value of your house and the amount of debt you owe on that property. The more quickly you pay off your mortgage, the more quickly you’ll build equity.

Disadvantages of the 10-year fixed mortgage

Just as there are advantages to signing up for a 10-year fixed-rate mortgage, there are also some disadvantages to keep in mind.

Higher monthly payments
How do you pay off hundreds of thousands of dollars over the course of 10 years rather than 30? By making higher monthly payments. As stated above, a larger chunk of these high payments will go toward paying down the principal on the loan, but either way the result is still the same — a higher mortgage bill each month.For example, if you were able to secure a 30-year, fixed interest rate of 5% on a $150,000 mortgage loan, your monthly mortgage payments would come to $805.On the other hand, if you agreed to a 10-year loan with the same fixed interest rate of 5% on a $150,000 home mortgage, your monthly mortgage payments would come out to $1,591, nearly double the payment you’d make with a 30-year loan.

For comparison’s sake, let’s look at a 15-year loan with the same terms. On a $150,000 home, your monthly payments would be $1,186.

May limit home purchase and affect your budget
Significantly higher mortgage payments each month may have an effect on the kind of property you can afford. It’s important to consider not just your current monthly budget, but also take into account any potential changes in income or unexpected life events that may arise over the next 10 years. If you lose your job or need to make major repairs on a property or car, will you be able to afford your higher mortgage?

If you’re looking to shorten the term of your mortgage but are hesitant to commit to a 10-year fixed-rate mortgage, you may want to consider a 15-year fixed-rate mortgage instead. You can think of it as a compromise between the 30-year loan, with its lower monthly payments but higher interest rates, and the 10-year loan, which comes with higher monthly payments and lower interest rates.

A 15-year fixed-rate home loan still offers lower interest rates than a 30-year loan, allowing you to pay off the loan more quickly while worrying less about being able to make your monthly mortgage payments during the entire term of the loan. In fact, when we checked 15-year loan rates on January 16, 2019, they were the same as or even lower than those for a 10-year mortgage.

For whom does a 10-year fixed-rate mortgage work best?

Before deciding on the term of your mortgage, be sure to take into account the advantages and disadvantages of selecting a 10-year fixed-term mortgage for you. The 10-year fixed-rate mortgage may be a sound option if you:

Are approaching retirement
If you’re approaching retirement with a steady income, the 10-year fixed-rate mortgage may be a good choice. This may be ideal for those looking to close out their mortgages sooner rather than later. However, it’s vital that anyone considering this loan be prepared for retirement with a healthy retirement fund. Those considering a 10-year mortgage should ideally be approximately 10 years from when they plan to retire.
Have a very steady income
Because the 10-year fixed-rate mortgage requires higher monthly payments, it’s crucial that you be able to afford these higher rates for the entire life of the loan. To ensure you’ll be able to keep up with high mortgage payments, you should have a high, steady income and robust savings.

Don’t have other significant debts
If you currently have a high amount of credit card debt or other high-interest debts, the 10-year fixed-rate mortgage may not be the right choice for your household. Instead, examine whether an aggressive plan to pay down those debts first might be a better choice.

On the other hand, if you have little high-interest debt and are planning to make paying off a mortgage your top financial priority, after careful consideration, you may wish to choose this home loan option.

Conclusion

A 10-year fixed-rate mortgage presents a range of pros and cons to homebuyers and those looking to refinance their homes. Weigh your options seriously and take into account how steady your income is and whether you’ll be able to keep up with high mortgage payments. Think about your financial goals, whether that’s building equity quickly or paying down other high-income debt.

Remember, too, that there is a middle ground between the 10-year fixed-rate loan and the 30-year fixed-rate loan: the 15-year fixed-rate loan.

This mortgage offers benefits from both loan programs, including lower interest rates than a 30-year loan while still shortening the life of the loan by making somewhat higher payments that may be easier for you to maintain over the years.

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Mortgage

How to Recover From Missed Mortgage Payments

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understanding good faith estimate vs loan estimate
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Can you bounce back from a missed mortgage payment or two? The answer is yes, but there’s work involved. After all, your payment history has the greatest impact in determining your credit score.

Falling behind on your mortgage payments can affect your credit and finances, and you could lose your home to foreclosure. It’s critical to be proactive and not wait until it’s too late to get help.

How missed mortgage payments affect your credit

In most cases, mortgage lenders give you a 15-day grace period before charging a fee — often around 5% of the principal and interest portion of your monthly payment — for late payments. But your credit history typically isn’t impacted until you’re at least 30 days behind on a mortgage payment. At this point, your mortgage servicer may report your late mortgage payment to the three major credit reporting bureaus: Equifax, Experian and TransUnion.

Your credit score could drop by 60 to 110 points after a late mortgage payment, depending on where your score started, according to FICO research. Being 90 days late on your loan could lower your score by another 20 points or more.

It can take up to three years to fully recover from a credit score drop after being a month behind on your mortgage, FICO’s research found. Once you’re three months behind on your mortgage, that time can increase to seven years.

Recovering from missed mortgage payments

Falling behind on your mortgage can be a frustrating and scary experience, particularly if you’re facing the threat of foreclosure. Here are some options to help you get back on track after missed mortgage payments:

  • Repayment plan. Your loan servicer agrees to let you spread out your late mortgage payments over the next several months to bring your loan current. When your upcoming payments are due, you’d also pay a portion of the past-due amount until you catch up.
  • Forbearance. Your servicer temporarily reduces or suspends your monthly mortgage payments for a set amount of time. Once the mortgage forbearance period ends, you’ll repay what’s owed by one of three ways: in a lump sum, a repayment plan or by modifying your loan.
  • Modification. A loan modification changes your loan’s original terms by extending your repayment term, lowering your mortgage interest rate or switching you from an adjustable-rate to a fixed-rate mortgage. The goal is to reduce your monthly payment to a more affordable amount.

Be proactive about getting back on track and reaching out to your lender for help instead of waiting until you get late payment notices. If you think you’ll be behind soon or are already a few days behind, make contact now and review your options.

Extra help for homeowners affected by COVID-19

If you’re behind on mortgage payments because of a financial hardship due to the coronavirus pandemic, you may qualify for a mortgage relief program through the Coronavirus Aid, Relief and Economic Security (CARES) Act.

Homeowners who have federally backed mortgages, and conventional loans owned by Fannie Mae or Freddie Mac, can request mortgage forbearance for up to 180 days. They can also request an extension for up to an additional 180 days.

Federally backed mortgages include loans insured by the:

  • Federal Housing Administration (FHA)
  • U.S. Department of Agriculture (USDA)
  • U.S. Department of Veterans Affairs (VA)

Reach out to your mortgage servicer to request forbearance. Even if your loan isn’t backed by a federal government entity, Fannie Mae or Freddie Mac, your servicer may offer payment relief options. You can find your servicer’s contact information on your most recent mortgage statement.

How many mortgage payments can you miss before foreclosure?

Your lender can begin the foreclosure process as soon as you’re two months behind on your mortgage, though it typically won’t start until you’re at least 120 days late, according to the Consumer Financial Protection Bureau. Still, it’s best to check your local foreclosure laws since they vary by state.

Here’s a timeline of how missed mortgage payments can lead to foreclosure.

30 days late

Your lender or servicer reports a late mortgage payment to the credit bureaus once you’re 30 days behind. Your servicer will also directly contact you no later than 36 days after you’re behind to discuss getting current.

45 days late

You’ll receive a notice of default that gives you a deadline — which must be at least 30 days after the notice date — to pay the past-due amount. If you miss that deadline, your servicer can demand that you repay your outstanding mortgage balance, plus interest, in full.

Your mortgage servicer will also assign a team member to work with you on foreclosure prevention options. This information will be communicated to you in writing.

60 days late

Once you’re 60 days late, expect more mortgage late fees, as you’ve missed two payments. Your servicer will send you another notice by the 36th day after the second missed payment. This same process applies for every month you’re behind.

90 days late

At 90 days late, your servicer may send you a letter telling you to bring your mortgage current within 30 days, or face foreclosure. You’ll likely be charged a third late fee.

120 days late

The foreclosure process typically begins after the 120th day you’re behind. If you live in a state with judicial foreclosures, your loan servicer’s attorney will file a foreclosure lawsuit with your county court to resell the home and recoup the money you owe. The process may speed up in nonjudicial foreclosure states, because your lender doesn’t have to sue to repossess your home.

You’re notified in writing about the sale and given a move-out deadline. There’s still a chance you can keep your home if you pay the amount owed, along with any applicable legal fees, before the foreclosure sale date.

Can you get late mortgage payment forgiveness?

If you’ve otherwise had a good payment history but now have one missed mortgage payment, you could try writing a goodwill adjustment letter to request that your servicer erase the late payment information from your credit reports.

Your letter should include:

  • Your name
  • Your account number
  • Your contact information
  • A callout of your good payment history prior to missing a payment
  • An explanation of what led to the late mortgage payment
  • The steps you’re taking to prevent late payments in the future

End the letter by requesting that your servicer remove the late payment from your credit reports, and thank your servicer for their consideration. Print, sign and mail your letter to your servicer’s address.

The letter is simply a request; your servicer isn’t required to grant late mortgage payment forgiveness. If your servicer agrees to remove the late payment info from your credit reports, your credit scores may eventually increase — so long as you continue to make on-time payments.

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.

By clicking “See Rates”, you will be directed to LendingTree. Based on your creditworthiness, you may be matched with up to five different lenders in our partner network.

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Mortgage

What Is the Minimum Credit Score for a Home 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.

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If you’re hoping to become a homeowner, your credit score may hold the keys to realizing that dream. Knowing the minimum credit score needed for a home loan gives you a baseline to help decide if it’s time to apply for a mortgage, or take some steps to boost your credit first.

It’s possible to get a mortgage with a score as low as 500 if you can come up with a 10% down payment. Keep reading to learn the minimum credit score requirements for the most common loan programs.

What are the minimum credit scores for home loans?

Your credit score plays a big role in determining whether you qualify for a mortgage and what your interest rate offers will be. A higher credit score means you’ll likely get a lower rate and a lower monthly mortgage payment.

There are four main types of mortgages: conventional loans, and government-backed loans insured by the Federal Housing Administration (FHA), the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA). Conventional loans, which are the most common loan type with guidelines set by Fannie Mae and Freddie Mac, have a credit score minimum of 620. Although some loan programs don’t specify a minimum credit score needed to qualify, the approved lenders who offer them may set their own minimum requirements.

The table below features the minimum credit scores for these home loans, along with minimum down payment amounts and for whom each of the loans is best.

Loan type

Minimum credit score

Minimum down payment

Who it’s best for

Conventional6203%Borrowers with good credit
FHA500-579 with 10% down payment
580 with 3.5% down payment
10% with a score of 500-579
3.5% with a minimum score of 580
Borrowers who have bad credit and are purchasing a home at or below their area FHA loan limits
VANo credit minimum, but 620 recommendedNo down payment requiredActive-duty service members, veterans and eligible spouses with VA entitlement
USDA640No down payment requiredBorrowers in USDA-eligible rural areas with low- to moderate-incomes

What is a good credit score to buy a house?

Meeting the minimum score requirement for a home loan will limit your mortgage options, while higher credit scores will open the doors to more attractive rates and loan terms. A good credit score can also provide you with more choices for home loan financing.

  • 740 credit score. You’ll typically get your best interest rates for a conventional mortgage with a 740 (or higher) credit score. If you make less than a 20% down payment, you’ll pay for private mortgage insurance (PMI). PMI protects the lender in case you default on your home loan.
  • 640 credit score. Rural homebuyers need to pay attention to this benchmark for USDA financing. Exceptions may be possible with proof that the new payment is lower than what you’re paying for rent now.
  • 620 credit score. The bare minimum credit score for conventional financing comes with the largest mark-ups for interest rates and PMI.
  • 580 credit score. This is the bottom line to be considered for an FHA loan with a 3.5% down payment.
  • 500 credit score. This is the lowest credit score you can have to qualify for an FHA loan, but you must put 10% down to qualify.

Annual percentage rates by credit score

Your mortgage rate is a reflection of the risk lenders take when they offer you a loan. Lenders provide lower rates to borrowers who are the most likely to repay a mortgage.

Here’s a glimpse of the annual percentage rates (APRs) and monthly payments lenders may offer to borrowers at different credit score tiers on a $300,000, 30-year fixed loan. APR measures the total cost of borrowing, including the loan’s interest rate and fees.

FICO Score

APR

Monthly Payment

760-8503.011%$1,267
700-7593.233%$1,303
680-6993.410%$1,332
660-6793.624%$1,368
640-6594.054%$1,442
620-6394.6%$1,538
*Based on national average rate data from myFICO.com for a $300,000, 30-year, fixed-rate loan as of May 4, 2020.

As the credit score ranges fall, the interest rates are higher. Borrowers with a score of 760 to 850, the highest range, saw an average monthly payment of $1,267. Borrowers in the lowest credit score tier of 620 to 639 saw their monthly payment jump to $1,538. The extra $271 in monthly payments adds up to an additional $97,560 in interest charges over the life of the loan.

Steps for improving your credit score

Now that you have an idea of the extra cost of getting a minimum credit score mortgage, follow some of these tips that may help boost your score.

  • Make payments on time. It may seem obvious, but recent late payments on credit accounts hit your scores the hardest. Set your bills on autopay if possible to avoid forgetting to pay one.
  • Pay off balances monthly. Try to pay your entire balance off each month to show you can manage debt responsibly.
  • Keep your credit card balances low. If you do carry a credit card balance, charge 30% or less of the available credit limit on each account.
  • Have a mix of different credit types. Mortgage lenders want to see you can handle longer-term debt as well as credit cards. A car loan or personal loan will help demonstrate your ability to budget for installment debt payments over time.
  • Avoid applying for new accounts. A credit inquiry tells your lender you applied for credit. Even if you were applying to get your best deal on a credit card or car loan, multiple inquiries could drop your scores, and give a lender the impression you’re racking up debt.

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.