Many people automatically think that they want a 30-year fixed rate mortgage. They feel that this offers the maximum peace of mind for homeowner loans in that they forever know exactly what their mortgage payment will be, and their house is completely paid off at the end of the loan (anyone up for a “mortgage burning” party?). This is true, but it is actually very expensive for you to go with the 30-year fixed rate option. Other programs offer a shorter length of time at a fixed rate that can save you many dollars of interest payments for only a slightly higher mortgage monthly payment. A shorter length loan (still at a fixed rate) usually can be obtained at a slightly lower interest rate, and you build up equity in the home much faster because of the higher monthly payment. Other common fixed-rate terms are 20 years and 15 years.
The differences in the amount of interest that you will pay over the life of the various fixed-rate loan options can be staggering. Lets look at a $200,000 fixed-rate mortgage at different life terms:
Monthly Total Interest
Term Rate Payment Paid over Life
30 years 6.00% $1,199.10 $231,676.00
20 years 5 3/4% $1,404.17 $137,000.08
15 years 5 1/2% $1,634.17 $ 94,150.60
The difference in total interest costs between 20 years and 30 years is dramatic! For an additional monthly payment of $205, you get a little bit lower interest rate and, more important, you save $94,675.92 in total interest payments almost half of what you paid for the house to begin with! If you can afford to pay $1,200 per month, you should be able to afford $1,400 each month otherwise you are probably buying more house than you can afford.
The buyer of your mortgage note will always price the loan for their purposes. A fixed rate may not be the best deal for you. Are you positive that you will be living in this house for the length of the mortgage life? On average, a mortgage lasts only about 7 years because the borrower moves to a different house or refinances at a lower rate. Think hard and long before you lock into a fixed rate mortgage. Check out other types of loan options first. Depending on current interest rate structures, a fixed rate may be preferable to a variable rate and vice-versa.
Happy home owning,