Finding a Mortgage You Can Come to Terms With
With mortgage rates still near record lows and expected to rise, now is a great time to buy or refinance a home. It’s also a great time to lock in those rates for the long term with a fixed-rate mortgage. But not all fixed-rate mortgages are alike; the one that’s right for you depends on a few factors, including:
- How long you plan to live in the home.
- Whether you prefer paying less per month or paying more per month over a shorter period of time.
- Whether you’d like lower interest fees or lower payments.
- Whether you expect your income to rise.
The most popular option is the 30-year fixed-rate mortgage, which offers the ability to lock in a competitive rate over a longer term, thereby keeping your monthly mortgage payments lower.
When choosing a mortgage, it’s important to note the following:
- The longer the term, the more interest you’ll pay over the life of the loan.
- The longer the term, the lower your monthly payments will be.
- The shorter the term, the less you will pay in interest.
- The shorter the term, the higher your monthly payment will be.
See the difference.
The good news is that in today’s low rate environment, many borrowers are able to choose shorter terms, such as 15 years versus 30 years, and still have manageable monthly payments. The example below from bankrate.com demonstrates that the shorter the mortgage term, the less interest you will pay. It assumes the buyer has a $100,000 mortgage. Rates are just examples and will vary by lender.
|Option||15-year fixed||30-year fixed|
|Monthly payment (principal and interest only)||$778||$568|
|Total payments over term||$140,010||$204,480|
|Total interest fees||$40,010||$104,480|
As you can see, with the 15-year mortgage your monthly payments are higher than with the 30-year mortgage. However, by choosing a 15-year mortgage your interest payments over the life of the loan are significantly lower ($140,010 versus $204,480).
Know the general rules.
A longer-term mortgage, such as a 30-year, might be right for you if:
- You expect your income to rise. If that’s the case, your monthly payments will be more affordable in the future, since your principal and interest payments won’t change.
- You plan on living in the home for a long period of time.
- You want to qualify for a higher mortgage loan amount.
In contrast, a shorter-term mortgage, such as a 15- or 20-year mortgage, may be right for you if:
- You can afford higher monthly payments.
- You don’t plan to live in the home as long.
- You want to reduce interest costs.
Prepayments of interest can help you reduce your loan term and interest paid.
Whatever mortgage term you choose, it’s important to note that you can always make additional payments on the principal at any time. This could effectively lower your interest fees and the term of the loan. For example, with rates so low, you might consider getting a 30-year mortgage and paying extra money toward the principal each month.
We can help you make the right choice.
If you’d like to learn more about the mortgage option that’s best for your unique situation, we’d be happy to help. Just stop by or call us at 563-588-1000.