Fixed rate mortgage (FRMs) is the most popular type of mortgage, and for good reason. They are designed to provide you with the peace of mind that your mortgage payments of principal and interest will stay stable for the life of your loan, hence the term ‘fixed’. Unlike with an adjustable rate mortgage, your monthly payment amount will never rise or alter due to adjustments by your mortgage lender or fluctuations in the market.
Predictable monthly principal and interest payments allow you to budget your monthly expenses easily. You will never need to alter how much you budget for your mortgage, unless of course, you decide to refinance your home under new terms or conditions. Since you are protected from rising interest rates, FRMs are usually the loan option of choice for homeowners who plan on living in their home a long time. However, that need not always be the case. In fact, there are plenty of other factors to consider when it comes to deciding upon your home financing and loan option. Are you thinking about retiring? Did you want to keep your home or lease it to others? Read on to see what the differences are between long and short term fixed rate mortgages.
Probably the most important factor to consider is your loan term. By term, we mean the length of time you plan on taking to pay off your loan. There are 10, 20, 15, and 30 year fixed mortgage rates. In general, the interest rate is directly related to how long you want your loan to term to be. The shorter your term, the lower your interest rate. The difference between a 10 year fixed mortgage interest rate and a 15 year rate is not really that significant. But the difference between a 15 year fixed mortgage rate and a 30 year fixed mortgage rate is approximately 1% (meaning a 15 yr. loan term has an interest rate that’s almost 1% lower than that of a 30 yr. loan term). So how do you know which is right for you? To illustrate the differences and benefits of each, we’ll compare a 15 year and 30 year fixed rate mortgage.
When you choose a shorter mortgage term, such as a 15 year loan, you benefit from a lower interest rate throughout the term of your loan. This saves the homebuyer thousands of dollars over the course of their mortgage. It also allows you to pay off your loan more quickly and build up the equity of your home faster. This is ideal for people who wish to retire and not worry about making further payments during their retirement, or those who expect to have other expenses in the future that they will need to devote a significant percentage of their income to. An example would be paying college tuition fees or world travel. When your mortgage is already paid off, your income can then be devoted to other high-cost ventures.
However, because you are paying off your entire loan plus interest in a shorter period of time, your monthly payments will be higher and you may have less disposable income throughout the duration of the loan. Something to keep in mind is that if you or your family should experience a reduction in income (such as the loss of a job) or an increase in expenses (as with medical bills) you may find yourself unable to make the higher monthly payments. The cost of refinancing for a longer loan term could cost you thousands in new origination fees. It also means that you will likely end up with a higher interest rate than you would have if you had gone with a longer mortgage term initially. In general, it’s a good idea for homeowners with a 15 year fixed rate mortgage to keep a buffer of savings in case something should happen in the future.
A 30 year fixed rate mortgage has a slightly higher interest rate (approximately 1% more than that of a 15 year fixed rate mortgage) and this naturally equates into spending more in interest payments over the course of the loan. An obvious advantage is that you benefit from fixed, standard payments and have 30 years in which to pay off your loan. While the loan costs more in interest, monthly mortgage payments may be quite a bit lower per month. This makes 30 year FRMs ideal for homeowners who intend on living in their home for a long time and who want to have more disposable income every month. It’s also a good idea for homeowners who want to rent their home out to others. The lower the monthly mortgage payment, the easier it is to charge a reasonable amount of rent and still make a slight profit. This generates a steady stream of cash flow.
Obviously, the disadvantages of a 30 year fixed rate mortgage are that it takes 30 years to pay off the loan and the amount spent in interest can be significantly higher.
What many homeowners choose is to opt for a 30 year fixed rate mortgage and then make higher than the required payments every month. This allows them to pay off their loan in a shorter period of time, thus lessening the life of their loan and the accompanying interest. However, should something unfortunate occur or their circumstances change, they are only obligated to the lower monthly payment of a 30 year mortgage. This means no refinancing for a longer term, no new loan fees, and no settling for a higher interest rate in the future.
Here at Mortgage Expert, we can help you choose the best home loan option for you individual situation and goals. We will describe all of the benefits and disadvantages of our various loan programs to you in detail, so that you have the information you need to make a fully informed decision regarding your financial future. Whether you feel a 10 year fixed rate mortgage, a 20 fixed rate mortgage, or even an adjustable rate mortgage could be right for you, feel free to contact us to speak to a licensed loan origination professional.
Call (407) 704-8729 to speak with a licensed mortgage professional or complete our fast quote form.