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A fixed rate mortgage is a mortgage where the interest rate stays the same
for the life of the loan. This is also known as a conventional mortgage.
The most common fixed rate mortgages are the 30 year and 15 year fixed rate
mortgages. Lenders do offer more choices in the fixed rate arena, with terms
of 10, 20 and 25 years becoming more common in recent years.
Advantages of a Fixed Rate Mortgage
- The mortgage payments
will not change as the interest rate fluctuates.
- The comfort of
guaranteed finance cost.
- Plan your expenses
with greater confidence.
30
year fixed rate
This is the industry standard. Payments are lower than on any of the shorter
term loans and althoug you end up paying more interest than on the shorter
term loans, this interest is 100% tax deductible.
A 30 year mortgage results in you paying a total of 2-1/2 times the price
of the home when you are done with all the payments.
15 year fixed rate
This is becoming a very common loan option for homeowners who can afford
larger payments than those on the 30 year mortgages. Although the term of
the loan is half that of the 30 year loan, your payment is not twice as
much due to the interest savings.
The interest rates on a 15 year mortgage are typically 1/4% to 1/2% lower
than the 30 year loans.
The main advantage of the 15 year fixed rate mortgage is the combination
of the shorter term and the lower interest rate that will save you a huge
amount of interest over the length of the loan.
20 year fixed rate
During this period of lower interest rates, the 20 year mortgage is a very
affordable option for those who cannot afford to make the payment on a 15
year mortgage.
If you have already paid on your mortgage for 5 years and are looking into
refinancing, consider the 20 year mortgage. Just look at this comparison
for a $150,000 mortgage.
| Loan Term |
Rate |
Monthly Payment
|
Total Payments
|
| 30 year |
7.50% |
1,048.82 |
Payments for
remaining 25 years
314,646.00 |
| 30 year |
6.75% |
972.90 |
Payments for
remaining 25 years
291,870.00 |
| 20 year |
5.50% |
1,031.83 |
Payments for
the 20 years
247,639.20 |
If your interest rate is now 7.5% you could save $67,006.20 and your payment
would even go down almost $76 a month!
Even if your interest rate is 6.75%, your payment would only increase $58
a month and you would save over $44,230.80. Not a bad investment for $58
a month is it? Plus, you have 5 years of no payments at the end of the loan!
Comparing 30 and 15 year fixed rates
Here is a side by side comparison of the total amount you would pay on a
$150,000 mortgage for both of these loans.
| Loan Term |
Rate |
Monthly Payment
|
Total Payments
|
| 30 year |
7.00% |
997.95 |
359,262.00 |
| 15 year |
6.50% |
1,306.66 |
235,198.80 |
| Interest
Savings $124,063.20 |
Yes, you read that right, you save almost the price of the house over the
length of the loan by making the payments for only 15 years.
Summary
A Fixed Rate mortgage is the mortgage to be in during these times of low
rates. Since many borrowers cannot commit to making that much more of a
payment each and every month to afford a 15 year mortgage, there certainly
are other options.
If there is any doubt whether you will or want to make the higher payments
of a shorter loan, do not consider it. You can always make higher payments
later on and pay off the loan faster.
For other borrowers, that $309 per month may actually add up to more than
the above savings if that money were invested in a 401k plan. Especially
for those at a younger age.
Discuss the options with your banker and use them for a source of advice,
not just an order taker for your new loan. Any good professional will have
the answers to your questions and perhaps come up with suggestions that
you have not thought of.
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