The most common form of mortgage is the fixed-rate
mortgage. This type of mortgage features a fixed interest rate and
set monthly payment amount for the life of the mortgage.
Fixed-rate mortgages are popular because many
borrowers are uneasy with the thought of their mortgage payment
rising and falling with interest rates. This instability
is risky for many borrowers. When rates are low, fixed-rate
mortgages are often the best choice for homebuyers.
When looking at fixed-rate mortgages, borrowers have
to decide how long do they want to stretch the payments out? The
most popular repayment terms are 15-year and 30-year. There are
advantages and disadvantages with each repayment term.
A 30-year mortgage offers the borrower a chance to
borrow money on a long term basis without having to worry about
changing interest rates. Monthly payments are lower for a 30-year
mortgage, because the interest is amortized over a longer period of
time. Lower monthly payments give borrowers extra money to use for
investments that yield higher rates of return.
The total amount of interest repaid over the life of
the loan is greater with a 30-year mortgage. And due to the longer
repayment term, the interest rate is usually slightly higher. But
the higher interest bill increases the amount of interest that
consumers can deduct on their federal income taxes, possibly
reducing their income tax liabilities.
Because the repayment term is stretched out, the
property will build equity at a very slow pace during the first
several years of the mortgage. This is because most of the monthly
mortgage payment goes towards the interest instead of the principal.
With a 15-year mortgage, borrowers build equity much
faster due to a shorter amortization schedule. The total interest
paid is much lower than with a 30-year mortgage. Because you are
borrowing the money for a shorter period of time, you will usually
see lower interest rates.
The monthly payment on a 15-year mortgage, though
stable, is higher than that of a 30-year mortgage. This often
restricts homeowners to a less expensive property than they could
afford with a 30-year mortgage.
For example, if you have a $150,000 mortgage at 6.64%
for 30 years, you will pay $961 a month in interest and principal.
Over the life of the mortgage, you will pay $196,304 in interest to
the lender.
With a 15-year mortgage for $150,000 at 6.10%
(interest rates are slightly lower for 15-year mortgages), you will
face a monthly payment of $1,274 each month. But you will only pay
the lender a total of $79,304 over the life of the mortgage.
With a 15-year mortgage, you save $117,001 in
interest. Your monthly payment will be $313 higher than the 30-year
mortgage. You have to consider if investing that money in your home
will give you a greater return than investing it in the stock
market, for example.
If you are looking at only owning the home for a short
period of time, you might want to consider an adjustable-rate
mortgage for your home
purchase.
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