It’s normal to feel a little dazed and confused with all the options available by a mortgage company. A person’s head can spin trying to make sense of it all!
Looking at the different ways to finance your new home, you might be drawn to the 15-year fixed mortgage. How does it compare with the other options?
Find out how the 15-year fixed-rate mortgage works, as well as why it’s a great choice when it comes to buying a home.
A 15-Year Fixed Mortgage is what it sounds like
The term fixed-rate mortgage refers to a mortgage loan with a fixed interest rate that remains the same for the duration of the loan.
Federal National Mortgage Association (FNMA) guidelines and rules apply to these loans. You might know it better as Fannie Mae, one of the largest investors in conventional loans.
Conventional fixed-rate mortgages are sometimes referred to as “vanilla wafer” loans. That’s because they’re simple and straightforward. Nothing complicated about them!
What Is a 15-Year Fixed-Rate Mortgage?
15-year fixed-rate mortgages provide a generic, structured approach to financing a home: You have a fixed interest rate and a set term, and you must put down a certain amount-usually between 5 and 20%.
The only difference between fixed-rate mortgages and adjustable-rate mortgages is the length of the mortgage term. Your monthly payments can be stretched for up to 50 years, but the most common terms are the 15-year and 30-year fixed-rate mortgages.
Fixed-rate mortgage loans consist of two basic components: the principal and the interest.
When you borrow money to buy your home, you have a principal.
The interest you pay is the compensation the lender receives for lending you the money.
Borrowing money involves spending more money. There is a silver lining if you choose a 15-year fixed-rate mortgage: You will have fewer interest payments!
The Advantages of a 15-Year Fixed Mortgage
Cash is the best way to purchase a home. However, if you decide to get a mortgage from a mortgage company Denver, we recommend getting a 15-year fixed-rate conventional loan with at least a 10% down payment (but 20% is more ideal so you can avoid paying PMI). Ensure that your monthly payment does not exceed 25% of your take-home pay.
What makes 15-year fixed mortgages the best option when it comes to financing your home? These are just a few:
Your interest rate and monthly payment remain the same
A 15-year fixed-rate mortgage loan requires you to make monthly payments for the principal and interest.
Because this is a fixed-rate mortgage, the interest rate remains constant throughout the term of the loan. As a result, your monthly payment (excluding taxes and insurance) will also remain the same.
You’re protected from rising interest rates in the long run, so you’ll save yourself a lot of stress. No matter what happens in the housing market, if your monthly payment is $1,500 on a 15-year fixed-rate mortgage, you will pay that amount every month for 15 years (unless you choose to pay more).
Their interest rates are lower than most mortgage loans
In general, 15-year fixed-rate mortgages have lower rates than any other type of mortgage. The reason is that the lender is less at risk with a 15-year loan. The longer the loan term, the more likely it is that the loan will not be repaid.
You can usually get a 15-year mortgage for 0.25% to 1% less than a 30-year mortgage. You will save thousands of dollars in the long run with a lower interest rate. Read on for more information.
Choosing a 15-year fixed-rate conventional loan will also spare you the fees associated with government-backed loans like VA loans and FHA loans.
They are much cheaper than other mortgages
When buying a home, people ask the wrong question: “What is the monthly payment?” What they should ask is: “How much does the total loan cost?”
The monthly payments for 15-year fixed-rate mortgages are higher than those of 30-year loans. Calculating the total cost of the loan and comparing the 15-year mortgage with the 30-year mortgage is staggering.
Consider borrowing $250,000 for a new home and choosing between a 15-year or 30-year mortgage:
The payment (principal and interest) for a 15-year fixed-rate mortgage at 3.6% interest is $1,745 per month.
In the case of a 30-year fixed-rate mortgage with a 4.3% interest rate, the monthly payment is $1,293.
The 30-year loan would save you $452 in monthly payments, but that’s just half the story.
If you choose a 30-year mortgage because the monthly payment is lower, you will end up paying $97,000 more than if you chose a 15-year mortgage.
How? You will pay a total amount of interest over the life of the loan. With the amount you can save by choosing a 15-year loan, you could almost buy your own house!
Find out how much of your monthly mortgage payment goes to principal and interest with the mortgage company.
You build equity faster when you own a home
The equity in your home is the difference between what it is worth and how much you owe on it. Equity refers to the portion of a home’s value that you actually own. You can build equity by paying down the principal on the loan.
You want more of your monthly payment to go toward the principal rather than interest, so you can own more of your home. A 15-year fixed-rate mortgage lets you pay more toward the principal and build equity faster from the very first payment.
A 30-year loan, however, has you pay more in interest (and less in principal) for the first few years of the loan, which means you build equity much more slowly.
You pay off your home 15 years sooner
You may also hear that 15-year fixed-rate mortgages are fully amortizing loans. A planned, incremental repayment schedule is just a fancy way to describe the process of paying off debts. If you make your scheduled monthly payments on your 15-year loan, you’ll be able to pay off your mortgage after 15 years.
If you take out a 30-year mortgage, you’ll be in debt for 15 years longer. If you take out a 30-year mortgage, you’ll be in debt for 15 years longer. Consider these costs:
By investing your $1,745 monthly payment into good growth stock mutual funds for the next 15 years after your term is over, you could add thousands to your retirement fund. Sounds better than 15 more years of mortgage payments!
Contact PierPoint Mortgage so that the mortgage company can save you the headache of breaking down costs yourself and help you finance your home smartly.