What Is a Conventional Fixed-Rate Mortgage? Benefits and How It Works
When buying a home, finding the financing option that works best for you is essential. If you’re looking for stability in your monthly payments and want to lock in a low interest rate for the life of your loan, a conventional fixed-rate mortgage could be a great fit.
What is a conventional fixed-rate mortgage?
A conventional fixed-rate mortgage is a home loan with an interest rate that remains the same for the entire term of the loan, providing stability and predictability in your financial planning.
Unlike adjustable-rate mortgages (ARMs), where interest rates can fluctuate based on market conditions, a fixed-rate mortgage locks in your rate.
This means your monthly mortgage payments remain consistent throughout the entire loan term, making it easier to manage your budget.
When to choose a conventional fixed-rate mortgage
The right mortgage option really depends on your situation — if you like knowing exactly what you’ll pay each month and plan to stay in your home long-term, a fixed rate is your best bet. But if you need smaller payments now and expect your income to grow, an ARM could work well for you.
How to qualify for a conventional fixed rate-mortgage
Qualifying for a conventional fixed-rate mortgage typically requires a combination of:
- Credit score: Mortgage providers usually require a score of 620 or higher. The better your score, the better your chances of securing a lower rate.
- Stable income: Consistent income helps demonstrate your ability to repay the loan. Lenders will typically ask for proof, like pay stubs or tax returns, to ensure you meet this requirement.
- Debt-to-income ratio: Your DTI should be reasonable, ideally at or below 50%. This shows lenders that your debt obligations won’t interfere with your ability to make mortgage payments.
Navigating down payments and PMI for a conventional fixed-rate mortgage
When it comes to down payments, the amount you need can vary. For first-time buyers, a down payment can be as low as 3%, making it easier to step into homeownership without a large upfront cost. But if you’re able to put down 20% or more, you can avoid Private Mortgage Insurance (PMI), which is an additional cost added to your monthly payment.
PMI is required when your down payment is less than 20% because it protects the lender in case you default on the loan. It can be removed once you’ve built up 20% equity in your home, either through paying down your mortgage or increasing your property value. This means your monthly payments could decrease over time, offering you more financial flexibility as you continue your homeownership journey.
Navigating mortgage options can be overwhelming, but it doesn’t have to be. Take your time to understand your choices and make the right decision for you.
