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What Length Mortgage Is Right For You?
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What Length Mortgage Is Right For You?You’ve found the home that is right for you, and now you need to do the same thing for a mortgage. There are several options for people out there, each one designed for a different type of buyer.
You need to ask yourself several questions when searching for a mortgage type.
How long am I planning on being in this home?
What monthly payment can I afford?
What type of payment fits into my long-term financial plan?
What type offers me the best rate for my situation?
Since most people like the security of knowing what their payments will be long term, many will get a 15 yr. Or a 30 yr. Fixed rate loan. But this may not be what would work best for you. Below are some things to consider when making your selection:
Fixed Rate Loan-
This works well for those with a steady income who like the stability of knowing what their monthly payments will be. If you have little or no down payment, a 30 yr. Fixed Rate loan is probably the best one for you. If you have a larger down payment and can afford a higher monthly payment you can opt for a Fixed Rate loan for 15 yrs., or even in lengths of 10, 20, or 25 years. Some lenders offer 40-year mortgages, which would allow some people to buy a larger house without the larger payment. The longer the loan terms, the more interest you end up paying. You always have an option to pay additional principal as the loan progresses. This would decrease the amount of interest you pay on the loan long term, and shorten the length of the loan.
Variable Rate Loan-
Most Variable Rate loans start out with a fixed rate for a specified length of time and change to a variable rate loan. These work well when people expect their income to increase dramatically after a few years, or those planning to move from the house after a few years. The most common loan lengths are 3/1, 5/1, 7/1, and 10/1. The first number is the length of time in years the loan is at a fixed rate. The second number is the length of time in years that it would adjust in after the fixed rate period. There is a cap on the amount of percentage points it can go up after the fixed rate period. It is usually 2% a year. With these types of loans you may pay more principal and less interest in the long run.
Biweekly Fixed Rate Loan-
This loan type works similar to the fixed rate loan, but essentially is a guarantee that you will put extra money toward your principal. You pay half your payment every two weeks instead of monthly. You end up making 13 payments a year instead of twelve, thereby reducing your principal early and reducing the length of your loan.
With some careful consideration on your part you will be picking the perfect loan for you in no time at all.
When considering what length mortgage is going to be right for you it would be wise for you to look at the breakdowns of the different loan options along with considering your age, when you plan on retiring, your current income and cash flow and your future financial goals. If you know that you will be retiring in 15 years and you will not be able to afford a mortgage payment because of a small retirement, then you may want to consider a 15 year mortgage if your finances will allow it.
Just to give you an idea of the differences in how much you will pay on different term loans look at the following 3 loan options:
100,000 loan, 30 year fixed rate at 7% = $665 Principal & Interest pymt. = $239,400 paid over the life of the loan.
100,000 loan, 20 year fixed rate at 7% = $775 Principal & Interest pymt. = $186,000 paid over the life of the loan. So for an extra $110/month you can eliminate 10 years off of your mortgage and save $53,400 in mortgage interest.
100,000 loan, 15 year fixed rate at 7% = $899 Principal & Interest pymt. = $161,820 paid over the life of the loan. So for an extra $233/month for 15 years you can eliminate your mortgage in 15 less years and save $77,580 in mortgage interest.
All of the above samples were based on the exact same loan terms, however usually when you lower your mortgage loan term the rate drops a little bit as well. To go from a 30 year term to a 20 year term will usually drop your rate about 1/4 percent and dropping your term from a 20 year term to a 15 year term will usually lower your rate by roughly another quarter percent. Thus if I would have taken this into account the overall savings would have even been a little greater for the 20 year and 15 year mortgage loan term options. Keep in mind also that the 30 year mortgage provides you with the lowest payment and you can always pay extra each month to pay your loan off in 15 years as well. This way you are not strapped the high payment of the 15 year loan and you have a little more flexibility each month with your monthly payment. You can pay extra when you have it and if you don't then you make the low 30 year payment.
Many borrowers with credit scores below 600 are interested in lowering their monthly mortgage payments, however interest only mortgages, which can save you 5% to 15% off your monthly mortgage payment each month, are generally only available to borrowers with stronger credit. An alternative may be to obtain a mortgage amortized over a different length of time, such as a 40 or 50 year mortgage, which can result in lower payments than a conventional 30 year principal and interest mortgage.
When comparing mortgages, always look at cost benefit. There are closing costs associated with the rate and mortgage length you choose. If you don't want to pay any closing costs you can opt for a 30 year fixed with a higher rate. Although, the rate will be higher you'll get more tax deductible interest.