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.
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.
|
| ||||||||
| Mtg Loan | Today | +/- | Last Wk | |||||
| 30 Yr Fixed: | 6.87% |  | 6.89% | |||||
| 15 Yr Fixed: | 6.16% | | 6.19% | |||||
| 30 Yr FHA: | 10-Year Fixed Rate |  | 6.34% | |||||
| 30 Yr Jumbo: | 5.72% | | 7.29% | |||||
| 1/1 ARM: | 6.37% | | 5-1 ARM |
| 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 | ||||||||
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.
1-year Adjustable-Rate Mortgage
An adjustable-rate mortgage (ARM) that has an initial
interest rate for one year, and thereafter has an adjustment interval of one
year. The adjustment is based on a comparison of interest caps and the indexed
rate.
Adjustable-rate mortgages, known as ARMs, differ from fixed-rate mortgages in that the interest rate moves up or down. ARMs are tied to a number of indexes, which usually are published interest rates. The margin is the amount a lender adds to the index , usually two percentage points or four percentage points, to set the actual interest rate of the ARM.
If you plan to be in the house for less than five years, it may be worth paying the lower interest rate on an ARM vs. a fixed-rate mortgage.
Jumbo 30-year Fixed Mortgage
This is considered a
nonconforming loan, because it exceeds the loan limit set by Fannie Mae and
Freddie Mac, the two publicly chartered corporations that buy mortgage loans
from lenders, thereby ensuring that mortgage money is available at all times in
all locations around the country. The 2003 Single-family Loan Limit Is $322,700.
If you need to borrow more than that, you will need a jumbo mortgage, which
generally has a higher interest rate than "conforming" loans.
30-year FHA Mortgage
Specifically designed for first-time
homebuyers this mortgage is insured by the Federal Housing Administration and has
a fixed interest rate over the 30-year term of the loan. With FHA insurance, you
can buy a home with a low down payment of 3-5 percent of the FHA appraised value
or the sales price, whichever is lower. FHA mortgages do have a maximum
loan limit that varies depending on the average cost of housing in a given
region.
You should check with your bank or financial institution about the requirements for any low down payment loans or first-time buyer programs they may offer.