| 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.
Example
Let’s say you have a $150,000 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 $117,001 in interest.
Loan term Rate Monthly payment Total interest
30 years 6.64% $961 $196,304
15 years 6.10% $1,274 $ 79,304
Interest savings: $ 117,001
But there are other factors to consider:
Take the example above: With the 15-year loan,
the monthly mortgage payment is $313 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 $313 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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