If you’re getting ready to buy a house, then you might be considering a fixed-rate mortgage. These types of mortgages are very common and a good option if you want a consistent monthly payment, because your payment is the same each month over the life of the loan. With an adjustable rate, your payment may go up or down from month to month depending on the current interest rates.
Many people shy away from adjustable-rate mortgages because they don’t like the unsteady, unpredictable monthly payment. When interest rates are relatively low, like they are now, a fixed mortgage is appealing.
Once you’ve decided that you’d like to pursue a fixed-rate mortgage, the next decision is whether the life of the loan will be 15 years or 30 years. There are pros and cons to each.
30-year fixed-rate mortgage
If you opt for a 30-year term, the monthly payments will be less because the total principal and interest are spread out over a greater period. If you’re spending less on your mortgage payment, you’ll have extra money for other investments or needs, like the kids’ college funds or home improvements. And when it comes time to file your taxes, you’ll be able to deduct all your interest, so your tax liability will be lessened.
On the downside of a 30-year mortgage, equity tends to build up slower because you’re paying more for interest and less is going toward the principal. Also, the amount you spend on interest over the life of the loan will be more than it would on a 15-year loan. Also, your interest rate will be higher on a 30-year loan that it would be on a 15-year.
15-year fixed-rate mortgage
For some, a 15-year mortgage is more desirable. For starters, your monthly payment will be higher, but, as the name states, your loan will be paid for in half the time. You’ll also be building equity much more quickly because your payments will be higher and you’ll be spending less overall on interest. Another advantage that piggybacks on spending less on interest is that you can get lower interest rates on a 15-year loan.
Disadvantages include being saddled with a higher monthly payment. Your budget might be tighter, and you’ll have less to set aside for savings, retirement, vacations, or your kids’ college funds. Also, because your payment is higher, you might be restricted on the house you buy. You might be able to get a larger, more expensive house if you go with a 30-year mortgage.
With a fixed-rate mortgage, it can be easier to plan a monthly budget. When rates are low, as they are now, you can lock in this lower rate. If rates were not low, an adjustable-rate mortgage might be more attractive, since you would pay less if rates dropped again. If you value the ease of knowing exactly how much your mortgage payment will be every month, though, fixed rate may be the way to go.
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