The number of mortgage programs available is shocking. However, most buyers only consider one – a 30-year fixed-rate mortgage.
But the 30-year fix (as we loan officers like to call it), has a smaller brother that, for some buyers, is a better option: 15-year fixed-rate.
With its shorter term, a 15-year fixed-rate mortgage has a higher monthly payment. For many buyers, this makes it seem less affordable. But, the shorter term actually makes the total cost of the loan less.
The Affect of Term on Cost
The thing that affects the cost of your mortgage the most isn’t your interest rate. It’s time. The longer you borrow money, the more it costs.
With a fixed-rate mortgage, a portion of your monthly payment pays the interest and another portion is applied to the principal. Initially, a larger portion is applied to the interest. However, as your balance shrinks, the percentage applied to your principal increases.
With a 30-year fix, your payments are smaller. Your principal balance shrinks at a slower rate. And therefore, you pay more.
The longer the term of a loan, the bigger the risk for the lending institution. With a 15-year term, the lending institution is taking less risk. Typically, this means you’ll be able to secure a lower interest rate.
If it’s Cheaper, Why Even Consider a 30-Year Fix?
Yes, the overall cost of borrowing is generally less with a 15-year fixed-rate mortgage. However, you have to be able to make that larger monthly payment for the next 15 years in order to make that a good decision.
Additionally, you need to consider whether you want to invest that extra cash in your home. Or, if you’d like to invest it elsewhere. It might be you could make more money than you’d save by investing in the stock market. Or, you could be socking away extra funds for your kids’ college fund.
How to Save Without as Much Risk
Want to enjoy (at least most) of the perks from a 15-year fixed-rate mortgage, without being locked into the larger monthly payment? Consider making larger payments on your 30-year fixed-rate mortgage, when you have the additional cash to do so.
Today, most mortgages don’t have a prepayment penalty. Just make sure each extra payment is directed towards your principal. While you won’t be able to benefit from the lower interest rate, you can substantially cut down how long it takes you to pay off your mortgage.
Talk to a loan officer today to start determining that is right for you – a 30-year or 15-year fixed-rate mortgage.