The Industry Standard: Fixed Rate Mortgages
Most lenders offer several
types of mortgages; the most common are the fixed-rate mortgages for 30
years or 15 years.
30-Year
Fixed Rate
This mortgage is an industry standard, as total payments are spread over
so many years that your monthly payments are lower than they would be on a
shorter term loan. The interest rate, which is set, or locked in, at the
time of obtaining the mortgage, remains the same throughout the life of
the loan. Check out the latest bankrate.com survey
of interest rates on 30-year fixed mortgages.
On a 30-year loan, you end
up paying thousands of dollars more in interest compared with a
shorter-term obligation, but this interest is 100-percent tax deductible,
which reduces your after-tax cost.
15-Year
Fixed Rate
This mortgage also is becoming a common loan because borrowers pay a lower
interest rate in exchange for larger monthly payments. Note, however, that
a smaller portion of your monthly payment goes for interest and therefore
the tax deduction is smaller.
With a 15-year mortgage you
could get an interest rate that is typically one-quarter to one-half
percent lower than a 30-year mortgage. The shorter the term, generally the
lower the interest. Yet, the main advantage is the fortune in interest you
will be saving during the life of the loan. Check out the latest
bankrate.com survey
of interest rates on 15-year fixed mortgages.
Calculator
To find out what the mortgage principal and interest would be on a
particular loan you may be considering, go to the bankrate.com "Calculate
your mortgage payment" page.
Example
Let's say you have a $100,000 mortgage. Let's compare how much money you
would pay out in interest over 30 years vs.15 years. The following chart
shows the numbers. The monthly loan payments are principal and interest
only. As you can see, with a 15-year loan, you would save $94,726 in
interest.
But there are other factors
to consider:
Take the example above:
With the 15-year loan, the monthly mortgage payment is $242 more than the
30-year mortgage. You may want to put that money toward another
investment. For instance, in a bull-market economy, you can make more
money investing that $242 monthly in mutual funds or other investment
securities.
Keep in mind that there are
ways to prepay your mortgage and whittle away at the principal each month,
so that the loan is paid off sooner than 30 years.
Also, it depends on how
long you plan to own the home you are purchasing. If it's less than five
years, you may be better off with an adjustable-rate mortgage, or ARM.
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