If you are like most Americans, your head starts spinning a little bit when you think about mortgages. Everyone knows you need a mortgage to buy a house, but what kind, at what rate, and what terms should you choose?
If you are looking to buy a house and have questions about mortgages, contact TwinCity Lending. We will help you navigate the mortgage landscape to determine how much home you can afford, and what type of loan will be the best for you.
What Does “Fixed Rate” Mean?
Most mortgages today are fixed-rate loans, which means that you borrow money at a specific interest rate that is ‘fixed’ or will not change over the life of the loan. This contrasts to adjustable rate mortgages, in which the interest rate adjusts based on the loan’s terms or the market.
Fixed-rate loans can be in a variety of terms, or lengths of the loans, but the most common terms for a mortgage are 15 years and 30 years. A 15-year loan has 180 payments, and a 30-year has 360 payments.
With each of these mortgages, your interest rate never changes. However, the amount of interest you pay differs greatly between a 15-year and a 30-year term. You’ll pay more than twice the amount of interest over the life of a 30-year mortgage as you would with a 15-year mortgage for the same dollar amount. The trade-off? The 30-year mortgage has a lower monthly payment. You pay less per month, but for twice as long.
Generally, a 15-year fixed rate mortgage means a lower interest rate but higher monthly payments. A 30-year fixed rate mortgage has a higher interest rate but lower monthly payments.
What is a 15-Year Fixed Rate Loan?
A 15-Year fixed rate loan is an excellent choice if you can afford a higher monthly payment and want to pay off your mortgage quickly.
There are many benefits to a 15-year fixed rate loan. Generally, these loans have a lower interest rate. You pay less in interest over the duration of the loan, and you will pay off your mortgage much faster. You will build equity more quickly, as well.
However, there are some negatives to consider. Because the loan is shorter, the payment will be higher, and you must meet stricter debt-to-income requirements. As a result, you may qualify for a smaller loan amount, which then correlates to a lower-priced house or a higher down payment.
What is a 30 Year Fixed Rate Loan?
The positives of a 30-year loan are substantial. Mortgage payments each month will be lower, which will give you more flexibility in your monthly budget for other expenses. A lower monthly payment often makes home-ownership possible for many people, allowing them to qualify for a loan. A 30-year loan can also be a way to purchase a larger or more expensive home or to make a smaller down-payment.
There are some cons to a 30-year loan, though. With the longer term loan, the interest rate tends to be higher than a shorter term loan. As a result, you will pay significantly more in interest charges over the life of the loan. You will also build equity at a much slower rate, which can create difficulties in a housing downturn or if you need to sell the home within the first few years of the mortgage.
Should You Choose 15-Year or 30-Year Fixed?
Knowing whether a 15-year or 30-year loan is right for you depends on your monthly budget, your upcoming expenses, your goals, and your short-term and long-term plans. Let’s look at an example of the difference between a 15-year and a 30-year fixed rate loan.
Bob wants a $200,000 mortgage to buy a house.
If he takes out a 30-year fixed rate loan with a 4.10% interest rate, his monthly payments will be around $966, without real estate taxes, homeowners insurance, or any mortgage insurance. At the end of the 30 years, Bob will have paid $347,903 for his $200,000 house. The $147,903 is interest paid.
If he chooses a 15-year fixed rate loan, he can generally obtain a lower interest rate. Let’s use 3.20%. Bob’s monthly mortgage will be $1,400 per month, also without real estate taxes or insurance. At the end of the 15 years, Bob will have paid $252,087 for the house.
This 15-year loan costs $434 more per month than the 30-year loan, but it is only 180 payments instead of 360 payments. With the 15-year loan, Bob will pay the house off sooner, and save $95,816 in interest. However, his budget might not be able to afford the higher monthly payment, especially if he also has credit cards, student loans, or child care expenses.
So, when should you choose each option? To answer that, you will need to look at where you have the most significant concerns, as well as how long you plan to be in the house. If your income fluctuates or is based on commissions, consider the 30-year fixed rate loan for the lowest monthly payment possible. If you are a first-time homebuyer without a large down payment saved up, a 30-year mortgage may be the best option. If you have many other debts, such as student loans, a 30-year mortgage will give you more money per month toward your other expenses.
If, on the other hand, you have a more stable income and fewer other monthly expenses, a 15-year fixed rate loan might be the better option. If you can afford the higher payment, choosing the 15-year saves you money over time because the interest rate is usually lower, as is the total amount of interest paid.
Call TwinCity Lending
At TwinCity Lending, our job is to help you navigate the mortgage qualification process and get you into your dream house. We will help you calculate all the options so you can make an informed choice about your loan and be in control of your finances every step of the way.
Whatever type of mortgage you are interested in, give TwinCity Lending a call. We will get to know you and your specific needs. We’ve helped hundreds of area homeowners qualify for a home with favorable rates and terms that fit their needs and budget. We’re here to help you, too. Give us a call, and let’s get started.