A fixed mortgage
rate has a fixed
interest rate
for the entire
length of the
loan, which is
typically 15 or
30 years. With a
fixed rate
mortgage, the
interest rate on
the loan remains
the same and the
amount of the
monthly mortgage
payment does not
change. One
advantage of
this is that you
will always know
what your
monthly payment
will be, making
it easier to
budget your
finances for the
long-term.
However, some
important
drawbacks to
consider when
deciding on a
fixed rate
mortgage are:
-
The interest
rate is
often higher
than that of
an
adjustable
rate
mortgage.
-
Fixed rate
mortgages
are not
assumable,
which means
you cannot
transfer
your
existing
mortgage to
a new buyer
if you sell
your home.
-
Some fixed
rate
mortgages
have
prepayment
penalties.
30 year vs. 15 year fixed rate mortgage
Once you decide
you want a fixed
rate mortgage,
the next
decision is
whether you will
want a 30 year
or a 15 year
loan.
-
The main
advantage of
a 30 year
mortgage is
that the
monthly
payments
will be
lower
because you
have a
longer
period to
repay it.
This
translates
into more
payments,
and
considerably
more money
paid in
interest
than with a
shorter-term
mortgage
loan.
However,
lower
monthly
payments can
free up more
of your
monthly
income which
can
potentially
be put to
more
productive
uses, such
as a
retirement
fund or
other
investment
securities.
Another
advantage in
taking a 30
year
mortgage is
that the
interest is
tax
deductible,
which will
reduce
after-tax
cost. In
addition,
you retain
the option
of paying
off your
mortgage
faster in
the future
if you so
desire so
long as you
do not have
a prepayment
penalty.
-
With a 15
year
mortgage,
the main
advantage is
the large
sum of money
you will be
saving on
interest
when
compared to
a 30 year
mortgage. In
general, the
shorter the
term of the
loan, the
lower the
interest
rate will
be,
therefore
you may also
be able to
get a lower
interest
rate, which
can vary
between
one-quarter
and one-half
percent
lower than a
30 year
mortgage.
However,
because the
loan is for
a shorter
term, the
monthly
payments
will be
larger, and
the tax
deduction
will be
smaller
because a
smaller
portion of
your monthly
payment is
going
towards
interest.
You also
risk
defaulting
on your
mortgage
payments if
you find
yourself
experiencing
financial
hardships.
Example: Lets take a $150,000 mortgage and compare how much you would pay on a
30 year fixed
rate mortgage
with an interest
rate of 6.84
percent versus
one for 15 years
at 6.10 percent.
On the 30 year
loan, your
monthly payment
will be $961
versus $1,274
for the 15 year
loan. However,
you will pay a
total of
$196,304 in
interest for the
30 year loan,
versus only
$79,304 for the
15 year loan - a
savings of
$117,001
