Does Checking Your Own Credit Score Hurt Your Credit Score?

Credit can be a confusing concept. But if you want to understand your credit scores, you can start by focusing on high-impact factors like your credit card utilization, payment history and any derogatory marks on your reports.

According to TransUnion’s July 2017 credit literacy survey, a lot of people think so. Of the 1,002 U.S. consumers included in the survey, nearly half thought that checking your own credit scores has the same effect as when a lender checks them.

Fortunately, this isn’t the case. As many know, checking your credit scores on Credit Karma is reported as a soft inquiry and it won’t negatively impact them.

But that got us thinking: What other questions or misconceptions do people have about credit? The factors that actually make up a credit score may be a lot different from what you think.

Let’s dig a bit deeper.

What’s in a credit score?

Below are the factors that are typically used to calculate your credit scores, by the level of impact they can have on your scores. Because there are different credit scoring models, how factors are weighted can vary slightly from model to model.

High impact

Credit card utilization: This refers to how much of your available credit you’re using at any given time. It’s determined by dividing your total credit card balances by your total credit card limits.

Most experts recommend keeping your overall credit card utilization below 30 percent. Why? Because lower credit utilization rates suggest to creditors that you can use credit responsibly without relying too much on it. Individuals whose credit card utilization soars above 30 percent may be more likely to fail to repay their loans than those who keep their balances low.

Another benefit of keeping your utilization low? Having available credit can help if something unexpected arises which you then have to pay for.

Payment history: This is represented as a percentage showing how often you’ve made on-time payments. Paying bills on time shows lenders and creditors that you’re reliable and more likely to pay back your debts.

Late or missed payments can significantly harm your credit scores, so it’s important to try to pay all your bills on time.

Derogatory marks: As of July 1, 2017, about half of all tax liens and nearly all civil judgments have been removed from consumers’ credit reports. That’s good news, because having those derogatory marks on your reports can lower your credit scores. Other derogatory marks that may affect your credit include accounts in collections, bankruptcies and foreclosures.

Medium impact

Age of credit history: This factor shows how long you’ve been managing credit. It doesn’t refer to — as some may think — your actual age.

While your average age of accounts isn’t typically the most important factor used to calculate your credit scores, it’s important to think about. Closing your oldest credit card account, for example, could end up negatively impacting your scores.

To sum up: The longer you manage your credit responsibly, the more you demonstrate your creditworthiness to lenders.

Low impact

Total accounts: This refers to the number of credit cards, loans, mortgages and other lines of credit you have.

Lenders generally like to see that you have used a mix of accounts on your credit responsibly. It generally shows that other lenders have trusted you with credit.

Hard inquiries: Hard inquiries usually occur when you apply for a new line of credit, such as a loan, credit card or mortgage, but can also take place when, for example, you rent an apartment.

A lot of hard inquiries on your credit reports within a short time period may suggest that you’re desperate for credit or aren’t getting approved by other lenders.

Hard inquiries can slightly lower your credit scores. It might seem counterintuitive: To build your credit, you need lines of credit — so why should your credit scores take a hit because you applied for a new account?

Some experts say that any time you take on a new credit obligation, there’s an element of risk involved. Credit models see that and want to understand if you’re able to handle that new obligation.

After you’ve made on-time payments for a few months, the impact of that hard inquiry should go away or diminish, experts say.

What Factors Affect A Credit Score?

From opening new accounts to making a late payment, there are a lot of things that can affect your credit scores. Learn which factors are generally most important, and which may only have a minor impact on your scores.

If you have a goal to reach a particular score or just want to learn more about credit scores in general, it’s important to know what affects your credit scores and how your actions could improve or hurt your creditworthiness.

Although there are many credit scoring models, all the scores are trying to figure out the same thing — the likelihood of you paying your bill on time, or even at all. And whether you’re looking at a FICO® or VantageScore® credit score, your scores are based on the same information: the data in your credit reports.

While various credit scoring models may weigh each factor differently, the leading ones, FICO® and VantageScore®, place similar relative importance on the following five categories of information. We’ve ranked them by which ones are often most important to the average consumer.

1. Most important: Payment history

Your payment history is one of the most important credit scoring factors.

Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them. The effects of missing payments can also increase the longer a bill goes unpaid. So a 30-day late payment might have a lesser effect than a 60- or 90-day late payment.

How much a late payment affects your credit can also vary depending on how much you owe. Don’t worry though, if you start making on-time payments and actively reduce the amount owed, then the impact on your scores can diminish over time.

If you’re having trouble making payments at all, you could also wind up with a public record, such as a foreclosure or tax lien, that ends up on your credit reports and can hurt your scores. Sometimes a single derogatory mark on your credit, such as a bankruptcy, could have a major impact.

2. Very important: Credit usage

Credit usage is also an important factor, and it’s one of the few that you may be able to quickly change to improve(or hurt) your credit health.

The amount you owe on installment loans — such as a personal loan, mortgage, auto loan or student loan — is part of the equation. However, even more important is your current credit utilization rate.

Your utilization rate is the ratio between the total balance you owe and your total credit limit on all your revolving accounts (credit cards and lines of credit). A lower utilization rate is better for your credit scores. Maxing out your credit cards or leaving part of your balance unpaid can hurt your scores by increasing your utilization rate.

Sarah Davies, senior vice president of analytics, research and product management at VantageScore®, says that for VantageScore® credit scores, your overall utilization rate is more important than the utilization rate on an individual account.

However, utilization rates on individual accounts can also affect your credit scores. This means you should pay attention to not just your overall credit utilization, but also the utilization on individual credit cards. Having a lot of accounts with balances might indicate that you’re a riskier bet for a lender.

Keep in mind that you can pay your bill in full each month and still appear to have a high utilization rate. The calculation uses the balance that your credit card issuers report to the bureaus, often around the time it sends you your monthly statement. You may have to make early payments throughout your billing cycle if you want to use a lot of credit and maintain a low utilization rate.

3.  Length of credit history

A variety of factors related to the length of your credit history can affect your credit, including the following:

• The age of your oldest account

• The age of your newest account

• The average age of your accounts

• Whether you’ve used an account recently

Opening new accounts could lower your average age of accounts, which may hurt your scores. However, the hit to your scores could also be more than offset by lowering your utilization rate and by increasing your total credit limit, making sure to make on-time payments to the new card and adding to your credit mix.

Closed accounts can stay on your credit reports for up to 10 years and increase the average age of your accounts during that time. But once the account drops off your credit reports, it could lower this factor, and hurt your scores. The impact could be more significant if the account was also your oldest account.

4. Credit mix and types

Having experience with different types of credit, like revolving credit card accounts and installment student loans, may help improve your credit health.

Since your credit mix is a minor factor, you probably shouldn’t take out a loan and pay interest just to add to your credit mix. But if you’ve only ever had installment loans, you may want to open a credit card and use it for minor expenses that you can afford to pay off each month.

5.  Recent credit

Creditors may review your credit reports and scores when you apply to open a new line of credit. A record of this, known as an inquiry, can stay on your credit reports for up to two years.

Soft inquiries, like those that come from checking your own scores and some loan or credit card prequalifications, don’t hurt your scores.

Hard inquiries, when a creditor checks your credit before making a lending decision, can hurt your scores even if you don’t get approved for the credit card or loan. But often a single hard inquiry will have a minor effect. Unless there are other negatives marks, your scores could recover, or even rise, within a few months.

The impact of a hard inquiry may be more significant if you’re new to credit. It can also be greater if you have many hard inquiries during a short period.

Don’t be afraid to shop for loans, though. Credit scoring models recognize that consumers want to compare their options. So multiple inquiries for mortgages, auto loans and student loans from a single 14- to 45-day period (depending on the loan and credit scoring model) may be treated as a single inquiry when calculating your scores.

Bottom line

There are many credit scores, and you may not know which one a lender is going to use when considering your application. However, consumer credit scores, which are determined based on the information in your consumer credit reports, weigh factors in a similar manner. If you focus on improving these factors, you could improve your credit health across the board.

What Is A Good Credit Score?

There’s no one definition of a good credit score. That’s because there are several different credit scores that depend on different scoring models with different score ranges, and different lenders have their own standards for rating credit scores.

That being said, scores starting in the high 600s and up to the mid-700s (on a scale of 300 to 850) are generally considered to be good.

How A Good Credit Score Can Help You

A credit score is a numeric representation, based on the information in your credit reports, of how “risky” you are as a borrower. In other words, it tells lenders how likely you are to pay back the amount you take on as debt.

Credit scores are one piece of the puzzle that lenders look at to determine whether or not to lend to you. A good credit score can help you get access to a greater variety of loan offers. And if a lender approves your application for credit, a good or excellent credit score can help you qualify for lower interest rates and better terms.

In general, the higher your scores, the better your chances of getting approved for loans with more-favorable terms, including lower interest rates and fees. And this can mean significant savings over the life of the loan.

Having a good score doesn’t necessarily mean you’ll be approved for credit or get the lowest interest rates though, as lenders consider other factors, too. But understanding your credit scores could help you decide which offers to apply for — or how to work on your credit before applying.

Credit Score Ranges

There are many different credit-scoring models, and each one uses a unique formula to calculate credit scores based on the information in your credit reports. Even the best-known credit-scoring companies, FICO and VantageScore, have multiple credit-scoring models that produce different scores. (Credit Karma offers free VantageScore 3.0 credit scores from Equifax and TransUnion.)

But while there are many different credit scores, the most common models all use a scale ranging from 300 to 850. Within this scale, there are some general credit score ranges that can help you interpret what your scores mean.

Here are the credit score ranges to be aware of and what they mean for you.

Poor credit scores: 300 to low-600s

Having poor credit scores can make it difficult to get approved for a loan or unsecured credit card. But a poor credit score isn’t a financial dead end. Certain financial products, like secured credit cards, can help people who are working on building their credit. These products can be a helpful stepping-stone to accessing credit with better terms — if you use them carefully.

Be aware of potential fees and higher interest rates with credit-building products. And make sure the issuer or lender reports to the three major consumer credit bureaus — Equifax, Experian and TransUnion — so that important actions, like when you make on-time payments, can contribute to your scores.

Fair To Good Credit Scores: Low 600s - mid 700s

While you’re comparing your options, know that applying for a new loan or credit card may result in a hard inquiry, which can have a negative impact on your scores. Loans with preapproval or prequalification options can give you an idea of the terms you might qualify for ahead of time.

Very Good And Excellent Credit Scores: Above Mid 700s

People with top credit scores are the most likely to be approved for loans and credit cards with low interest rates and good repayment terms. But having very good or excellent credit scores doesn’t mean you’re a shoo-in for every loan or credit card out there. A lender could deny an application for another reason, like a high debt-to-income ratio.

Regardless of your scores, it’s a good idea to keep an eye on your credit reports so that you’ll know what lenders will see once you apply for a loan.

What Is The Highest Credit Score You Can Get?

There are lots of different credit scores with different ranges out there. But for the major consumer credit scores, generally the highest credit score you can get is 850.

Keep in mind that perfect credit scores may not be necessary to qualify for great rates on loans and mortgages. Once you’re in the “very good to excellent” range, you likely won’t see much of a difference in terms of interest rate offers from, say, a 790 to an 840. Moving from a 650 to a 700 will likely have a more significant impact, which is why the general credit score ranges are important benchmarks to consider.

How Good Should My Credit Scores Be…

To Buy A House

With today’s market, you can purchase a home with a credit score as low as 620, which is the lower end of the “good” credit range. But credit requirements vary depending on your state.

To Rent An Apartment

Prospective landlords may run a credit check before you can sign a lease, but there’s no single credit score benchmark you need to hit to be able to rent an apartment. It can depend on the factors the landlord is looking for in a tenant, as well as where you’re looking to rent.

To Get Approved For A Credit Card

It’s possible to get approved for a credit card with poor credit — or even no credit at all. Once you know what range your credit scores fall into, you can research cards that suit you and your goals.

If you have no credit, look for secured cards or cards for beginners (like student cards). If you have limited or poor credit, secured cards or cards advertised for building or rebuilding credit could be a helpful leg up. Once you’ve improved your credit, you may be able to qualify for more-enticing offers, such as rewards cards or balance transfer cards.

To Get Approved For A Car Loan

You may be able to get approved for a car loan with a poor credit score, but it could be more difficult to find one to qualify for, and you could face high interest rates. If you’re still working on your credit and can’t wait to take out a car loan, consider asking a trusted family member or friend to act as a co-signer, or see if you can put down a larger down payment.

Good credit scores can mean better terms, but it’s still worth comparison shopping.

FAQs

How do I get a good credit score?
Building a good credit score can take time. Here are some general practices we recommend that can help you stay on the right track.

• Check your reports. Knowing your scores and being aware of what’s on your credit reports is the first step to working on your credit. You can check your credit reports from Equifax and TransUnion for free on Credit Karma. Credit Karma also offers free credit monitoring.

• Pay on time. Your payment history is a major factor in your credit scores.

• Pay in full. Keeping your credit card balances low can not only save you money on interest, but can also help keep your credit utilization rate down. Your credit utilization rate is how much of your available credit you’re using. A good rule of thumb is to keep it below 30% of your total credit limit.

• Don’t close old credit accounts. A longer credit history can help increase your credit scores by showing that you understand credit and have been using it for a long time. Keeping your oldest accounts open can ensure that your overall credit history continues to age.

• Consider your credit mix. Your credit mix reflects the different types of credit you have on your reports, from credit cards to student loans. We don’t recommend applying for a loan just to get another type of credit account on your reports, but it’s good to know that this can factor into your scores.

How long does it take to get a good credit score?

It depends on where you’re starting from and what challenges you’re facing. But building good credit probably won’t happen overnight.

If you’re brand new to credit, it could take months of using beginner products like secured cards to make significant progress in the types of financial products you qualify for. If you have dings on your credit reports, like late or missed payments or a bankruptcy, it could take years for those derogatory marks to fall off and stop affecting your scores.

But even if you have years left before those derogatory marks officially fall off, you can still see significant progress. The important thing is to work steadily toward getting your credit in good shape and understand that building credit is a journey.

How do I find out what my credit scores are?

You can get your scores from Equifax and TransUnion for free on Credit Karma. Checking your own scores won’t hurt your credit. And you’re entitled to free credit reports from Equifax and TransUnion each year with details about important credit factors so that it’s easy to track your progress.

What Is An Interest Only Mortgage?

In an interest only mortgage, the borrower covers interest on payments for a specific period of time, paying the cost of borrowing money up front, while the principal remains unchanged. This allows for reduced monthly mortgage payments early in the loan term. An interest only home loan can offer flexibility to buy a more expensive home than a borrower initially qualifies to buy. They can also be a great way to lower payments so you can divert your cash flow toward retirement, college tuition or a rainy day fund.

In traditional mortgages, payments are applied to both interest and principal. Through amortization the balance of the loan decreases over the term of the loan. Interest only mortgages are structured differently: The most common version pushes back the amortization schedule, usually 5 to 10 years, while the borrower pays interest only. The other type lasts the duration of the loan, with an agreement principal that will be settled with one balloon payment at the end of the term.

While initial payments as part of an interest only mortgage are lower, borrowers should be aware that over the life of the loan they are more expensive than traditional mortgages. Interest only loans can also be subject to adjustable interest rates. Negative amortization, a feature where missed interest payments are applied to the principal balance, is also a risk inherent to interest only loans. Keep reading to learn more and explore the circumstances that make the most sense to purse an interest only loan.

Is an interest only mortgage right for you?

Here are five questions to help you determine whether an interest only mortgage is the perfect match:

• Are you confident your income will grow in the future, but want to purchase high-value real estate now?

• Are you more interested in lower monthly mortgage payments than building home equity?

• Are you looking to invest your money in something other than your home?

• Are you fine with the prospect of your monthly mortgage payment going up when the interest-only term ends?

• Do you own investment homes and rent them out?

If you answered “YES” to any of these questions, an interest only mortgage might be your best bet! A word of consideration—while interest only home loans offer low monthly payments during the initial term of your loan, your monthly payments will rise after this term ends to cover the principal. If you don’t expect your income to increase in the foreseeable future or if you’re unsure you’ll be able to make the larger payments later on, a 15 or 30-year fixed rate mortgage could be a better fit. In addition, it may be more difficult to refinance your mortgage if your home value doesn’t increase during the lifetime of your loan. Those buying a home for the first time may find interest-only mortgages particularly beneficial. For new homeowners, who are unaccustomed to the higher cost of mortgage payments and the other costs of maintaining a home, the first years of home ownership can be particularly challenging. In many cases, you are buying a house you expect to pay off years down the line, when you are more established and may be making more money, thus the initial costs may seem daunting. If a water heater suddenly needs replacing or a roof suddenly needs to be fixed, the option to exercise an interest only mortgage at that time can come in handy, as long as you are able to cover the higher monthly payments later on.If your income is subject to fluctuation either because of freelance work or commissions and bonuses, rather than a typical flat salary, an interest-only mortgage can be similarly beneficial. Pay interest-only payments during leaner months and years with the anticipation of paying more later on. Risks of interest only payments. Making a smaller monthly payment for a period of time, with the anticipation that you’ll have the money to make larger payments down the line, always carries a risk. The total balance of what is owed on your mortgage is not changing, thus if your financial circumstances do change you may find monthly payments more difficult down the line. Additionally, the housing market can be fickle and the property purchased may fail to appreciate in value. Even if the value remains much the same, if the borrower has negative amortization you may wind up owing more on the mortgage than the actual value of the house making it difficult to make a profit on the house when and if they decide to sell. How much is an interest only payment?

When considering an interest only mortgage, do the math to figure out if you're able to handle the amount of the monthly payment. Figuring out the monthly interest only payment on your mortgage is easy. Say that the unpaid loan balance on your property is $400,000 with an interest rate of 7%. Multiply those numbers together for an annual interest of $28,000. Divide that number by 12 months and you can find your monthly interest payment: $2,333. Keep in mind that after the interest-only period, your payments will increase as you begin to pay back the loan principal.

What Is A VA Loan?

What is a VA home loan?

The US Government's VA loans program helps veterans, active-duty service members and their families qualify for a home loan. Though they are issued by private lenders like Guaranteed Rate, VA home loans are backed by the US Department of Veterans Affairs. Created during World War II to help returning service men and women purchase homes, this program has guaranteed over 22 million VA loans since 1944.

VA home loans feature no down payment or private mortgage insurance (PMI) requirements, making them a great choice for any veteran or active service member looking to purchase a home. Since the housing market collapse of the 2000s, VA home loans have become even more critical in the wake of stricter lending requirements. For this reason, a guaranteed VA loan is often the best and easiest way for veterans to purchase a home of their own.

What are VA home loan requirements?

A VA loan is a no-brainer for qualified homebuyers and refinancers. The intended candidate is a service member or surviving spouse with a clean financial record. Ask yourself these four questions to determine if you meet the minimum VA home loan requirements:

• Are you a current or ex-military personnel?

• Are you the surviving spouse of a current or ex-military personnel?

• Have you defaulted on a home loan within the last 12 months?

• Have you declared bankruptcy within the last two years?

If you answered "YES" to either of the first two questions and a resounding "NO" to questions three and four, you most likely meet the basic VA home loan requirements.

Other VA home loan requirements have to do with military service time. Specifically, you must have serve for 90 or more days in wartime or 181 or more days in peacetime. In both cases, the stipulation is waived if you are discharged due to a service-related disability. Reserves and National Guard soldiers must serve for at least 6 years to be eligible.

Spouses of deceased service members are eligible for VA loan benefits, provided they have not remarried and that the deceased either:

• Died in service or from a service-related disability.

• Was missing in action or a prisoner of war for at least 90 days.

• Was rated totally disabled and was eligible for disability compensation at the time of death.

Children of deceased veterans are not eligible for VA loan benefits.

The VA loan home advantage

VA loans are fully backed by the government and offer a myriad of advantages for your home purchase or mortgage refinance. Here are the six biggest:

No money down

While conventional loans generally require down payments that can reach up to 20%, no such thing is required with a VA home loan at or under the local conforming limit. Down payments are still an option, of course, but they are not a requirement. The VA allows you to purchase jumbo loans, but requires you to supply 25% of the difference between the loan amount and the loan limit.

No PMI

Private Mortgage Insurance (PMI) is a requirement when you put less than 20% down on the purchase of a home and typically adds 0.2-0.9% of expenses to your monthly mortgage. With a VA loan, you can wave goodbye to PMI!

Competitive interest rates

Since VA loans are guaranteed by the federal government this can provide lenders with a greater sense of safety and flexibility. This can ultimately lead to a more competitive interest rate than you may otherwise receive.

Easier to Qualify

Similarly to the interest rates, the VA loan being backed by the government also lets the banks assume far less of the risk. This can lead to less stringent qualification standards, once the aforementioned qualifications are met.

Fewer credit restrictions

Reduced restrictions mean easier qualification. With a VA loan, you’re allowed a higher debt-to-income ratio and afforded more leniency with your credit score.

Seller assistance

The VA allows sellers to assist with up to 4% of closing costs.

Easy refinance

Borrowers can refinance their homes with a VA streamline or cash-out loan. The streamlined version lowers the mortgage rate of an already existing VA loan, usually for less than the current principal and interest. This means it doesn't require a credit check or appraisal. The cash-out option involves a credit check and appraisal, since the home’s value represents the maximum loan amount and the new loan will be larger than the existing loan.

What Is An FHA Loan?

FHA home loans are mortgages insured by the federal government through the Federal Housing Administration (FHA), a branch of the Department of Housing and Urban Development. FHA home loans reduce the barrier to entry for homebuyers and refinancers by featuring low down payments, flexible credit requirements and more purchase power. If funds are limited, an FHA home loan can help you finance more than 80% of your home value.

What are FHA loan requirements?

In order to ensure that you meet the minimum FHA loan requirements, you need to consider the following factors.

• Are you over the age of 18?

• Do you have a valid Social Security number and lawful residency in the United States?

• Do you have a steady employment history? If not, have you at least worked for the same employer for the past two years?

• Can you afford the minimum down payment of 3.5% or 10% (depending on credit score)?

• Do you have a credit score above 620?

• Have you been out of bankruptcy for at least the past two years?

• Will this home be your primary residence?

You’ll likely need to be able to answer all of these questions with a hearty ‘YES’ in order to meet FHA home loan requirements.

The FHA home loan advantage

FHA home loans are backed by the federal government and offer you a myriad of advantages for your home purchase or mortgage refinance.

Minimum down payment option of 3.5% for qualified buyers

For those with credit scores of 620 and above, the down payment for an FHA loan is 3.5%. (For those with credit scores below 620, a 10% down payment is required.)

Easier to qualify

FHA requirements are, typically, less strict than typical loans. Although a credit score below 620 does not allow you to take advantage of the 3.5% down payment option, conventional lenders require a minimum credit score of 620 or higher.

No maximum income restrictions

Seller assistance with up to 6% of closing costs

FHA home loans allows the seller to pay up to 6% of the closing costs, including any costs of the appraisal, title expenses and a credit report.

203k renovation loans with a minimum 620 FICO score.

If you need extra cash to repair or renovate your home, FHA offers 203(k) loans that offer you loans based not on the current appraised value of the home, but the projected value after these renovations would take place. The extra money you receive from the loan after the purchase of the home can then go towards these renovations. This can be used to cover painting, roofing, plumbing, heating and air-conditioning and full room remodels. This is generally only eligible for those with a credit score of 620, more along the lines of a minimum credit score for a conventional loan.

Loan limits adjusted annually

FHA home loans have a maximum loan amount (or “ceiling”) that is regularly adjusted every year and vary according to the cost of living in a given area. This annual adjustment increases your likelihood of getting an FHA home loan that meets your current needs.

With an FHA loan, you can use borrowed money and other gifts from family members to cover down payments and closing costs. And don’t worry about prepayment penalties! An FHA loan lets you refinance or pay off your home early without having to deal with extra fees or other sticking points. As long as you meet FHA requirements, an FHA home loan may be within your future!

What Is A Jumbo Loan?

A non-conforming jumbo mortgage can help you purchase a lot of real estate. This mortgage is needed for loan amounts over the conforming loan limit of $484,350 and $726,525 in high-cost areas. If you need to take out a loan over the conforming limit, a fixed or adjustable rate jumbo mortgage could be your ticket to a big and beautiful home.

View Today's Jumbo Mortgage Rates

There is, however, one key difference: Jumbo loans are ineligible for purchase by Fannie Mae or Freddie Mac and must be sold in the secondary market. What does this mean? Jumbo loans can require more stringent credit guidelines and larger down payments than conforming loans.

Is a jumbo mortgage right for you?

Can you afford high-value real estate but don’t have enough saved up to bring a loan down to the conforming limit? A jumbo mortgage can help you make your move! If your financial situation is on the upswing, a jumbo loan can be a good way to bypass a starter home and purchase the full-sized home of your dreams.

Jumbo loan features

A jumbo mortgage is a great way to rapidly build your credit. On-time payments will improve your score by leaps and bounds. One important note—it may be more expensive to refinance a jumbo loan due to higher closing costs.

What Is An Adjustable Rate Mortgage?

An adjustable rate mortgage (ARM) is a home loan with an interest rate that changes after a fixed amount of time—usually 5-7 years. Adjustable rate mortgages s typically offer lower interest rates and lower monthly payments than a fixed rate mortgage. After the allotted time passes, the rate may adjust and your monthly mortgage payments will adjust accordingly.

View Today's 5-Year ARM Mortgage Rates

View Today's 7-Year ARM Mortgage Rates

If your top priority is a low monthly payment or you don't plan on staying in your home for more than 5-7 years, an adjustable rate mortgage (ARM) could be right for you. If flexibility is your top priority, this loan can be a viable alternative to a 15 or 30-year fixed rate mortgage.

Is an adjustable rate mortgage right for you?

An adjustable rate mortgage can give you low rates and extra security—important considerations when searching for your perfect home. The benefits of an adjustable rate mortgage include:

• ARM rates can be lower than a 30-year fixed rate.

•  ARMs can feature lower monthly payments early on in the loan term, allowing you to maximize cash flow.

•  ARM rates do not change during the initial term (5, 7 and 10-year options available).

•  Adjustment rate caps offer extra protection.

•  ARMs may benefit first-time homebuyers and those looking to refinance. With the lower monthly payments of ARMs, you may be able to buy a larger home you wouldn’t be able to otherwise.

As the borrower, you take advantage of lower initial payments by leveraging the possibility that the mortgage interest rate could increase after the initial term. This means that your adjustable rate mortgage transfers part of your home loan’s interest rate risk from the lender to the borrower, giving you the lowest rate on the market.

An adjustable rate mortgage is also a great way to qualify for a higher loan amount, giving you the means to purchase a more expensive home. Many homebuyers will take out large mortgages to secure a 1-year ARM and later refinance to prevent a rate hike.

However, ARMs are not the ideal mortgage solution for everyone. The following are some particularities of adjustable rate mortgages that may be less than ideal, causing you to rethink a standard fixed mortgage rate. .

•  Over the life of a loan, rates and payments can rise rather dramatically over the life of the loan. Depending on rates, is not uncommon for an ARM to double over just a few short years.

•  ARMs are generally more complex to understand than a typical fixed rate. An adjustable rate mortgage affords lenders the flexibility to determine adjustment indexes, margins, caps and more.

•  Negative amortization loans, a certain type of adjustable rate mortgage, can cause borrowers to wind up owing more money than they did to begin with. The reason is that the payments are set so very low, that even the interest is not being completely paid off. All of this then, naturally, gets rolled over to the balance, which can be formidable when all is said and done.

So, what’s the better choice? An adjustable rate mortgage or a fixed rate mortgage? This is a determination you will, of course, have to make yourself. Each offers something different. Fixed-rate mortgages offer a permanent rate and a sense of security but at rates that can seem daunting. An adjustable rate mortgage costs less initially, which is appealing, but may ultimately lead to uncertainty.

These key differences will be a huge factor in your decision but there are other important questions to answer when deciding which loan is better for you:

1. What is the current interest rate environment?

A major determining factor may be the current interest rate environment. If rates are low, a fixed-rate mortgage makes the most sense – you’re in an ideal financial environment that you won’t want to jeopardize. However, if rates have become high, things change. With an adjustable rate mortgage, you have a lower initial rate to begin with and if (and when) rates eventually fall, you may well wind up with lower payments. In the meantime, you get to enjoy the benefits of owning your own home.

2. Do you plan on staying in the home long?

If not, an adjustable rate mortgage may be the right call. Your initial payment and rate will be low and, if you’re only planning to stay for a few years, you’ll avoid exposure to the huge rate adjustments that can be an ARMs downfall. Meanwhile, you can build up your savings for the more ideal home you may have your eye on.

3. When is the adjustment for the ARM made? How frequently does it adjust?

After an initial fixed period, odds are your adjustable rate mortgage will adjust fairly frequently. Usually, this is on the same date as the initial mortgage making it a yearly anniversary you can count on, but in some cases they adjust much more frequently – sometimes even every month. For some, this can be volatile and overwhelming making a fixed-rate mortgage more appealing.

What Is A 15 Year Fixed Rate Mortgage?

A conventional 15-year fixed rate mortgage is similar to a 30-year fixed rate mortgage in many respects. A conforming 15-year fixed rate loan features a limit of $484,350 ($726,525 in high-cost areas) and a consistent rate throughout its lifetime, giving you secure and predictable monthly mortgage payments. So what does this loan offer that a 30-year fixed rate loan doesn’t?

View Today's 15-Year Fixed Mortgage Rates

The main difference is the length. With a 15-year mortgage, you’ll pay off your mortgage in half the time, putting you on the fast track to full amortization. A 15-year fixed rate mortgage also features lower rates than its 30-year counterpart. A shorter loan term plus lower mortgage rates means less interest on your loan and more money in your bank account! Conventional 15-year fixed rate mortgage features include:

• 3-5% minimum down payment options for qualified homebuyers.

• Regular, qualified income required.

• No private mortgage insurance (PMI) with 20% or more down.

• Seller assistance with up to 3% of closing costs.

• Loan options up to $5 million for non-conforming mortgages.

• Home Style renovation loans with options as little as 5% down.

• 203k renovation loans with a minimum 620 FICO score.

Is a 15-year fixed rate mortgage right for you?

A 15-year fixed rate mortgage is popular with two different demographics. Younger homebuyers with sufficient income often use it to pay off their home before their children start college, while older homebuyers with established careers and higher income use it to pay off their mortgages before retiring. A word to the wise: 15-year fixed rate mortgages feature higher monthly payments than a 30-year loan. You’ll need to factor that into your budget when deciding whether this loan fits your needs.

What Is A 30 Year Fixed Rate Mortgage?

What is a 30-year fixed rate mortgage?

A conventional 30-year fixed rate mortgage features a steady interest rate throughout its lifetime. Spanning three decades, homeowners with this mortgage can look forward to consistent monthly payments for many years to come, which can provide peace of mind and help them budget their finances. A conforming 30-year fixed rate loan offers amounts up to $484,350 in most of the US and a maximum of $726,525 in high-cost areas. To decide if a 30-year fixed mortgage is right for you, ask yourself these four questions:

View Today's 30-Year Fixed Mortgage Rates

• How long are you planning to stay in your home? If you are considering a 30-year fixed rate mortgage, you should be planning to stay put for the long haul. We recommend a minimum of 5-10 years in your new home.

• Would you prefer consistent monthly mortgage payments? Like the sun rising in the east, the terms of a 30-year fixed rate mortgage never change. A consistent interest rate throughout the lifespan of your loan keeps your monthly mortgage payments the same for 360 months. Kiss those fluctuating mortgage payments goodbye!

• Would you prefer a low mortgage payment? Due to the long-term nature of this loan, a 30-year fixed rate mortgage makes your monthly mortgage payments more affordable than a fixed rate mortgage with a shorter time frame. You end up paying more interest over three decades, but the principal repayment is spread over that same period of time. Lower monthly mortgage bills mean you can afford more house!

• Are you purchasing or refinancing? Looking to buy a new home? This mortgage option is tailor-made for you. Looking to refinance your home at a lower rate? A 30-year loan may be too long. Consider a shorter term fixed mortgage or an adjustable rate mortgage based on your budget and refinancing goals.

Conventional 30-year fixed rate mortgage features include:

• 3-5% minimum down payment options for qualified homebuyers.

• Regular, qualified income required.

• No private mortgage insurance (PMI) with 20% or more down.

• Home Style renovation loans with options as little as 5% down .

• Seller assistance with up to 3% of closing costs.

• Loan options up to $5 million for non-conforming mortgages.

• 203k renovation loans with a minimum 620 FICO score.

30-Year Fixed Mortgage Payments

As with most amortized loans, the initial payments of your 30-year fixed rate mortgage are primarily devoted to paying off interest. As the years roll by, this will gradually shift and you’ll reach a point where your monthly payments cover more principal than interest.

What does this mean? As you embark on your 30-year fixed rate mortgage, your first couple years of mortgage payments won’t make much of a dent in your loan’s principal balance. Once you pay off most of the interest, the latter years of your mortgage will be devoted to your principal and you’ll see your mortgage balance decrease dramatically.