Most lenders offer several types of mortgages; the most common are the fixed-rate mortgages
for 30 years or 15 years.
30-Year Fixed Rate
This mortgage is an industry standard, as total payments are spread over so many years that
your monthly payments are lower than they would be on a shorter term loan. The interest
rate, which is set, or locked in, at the time of obtaining the mortgage, remains the same
throughout the life of the loan. Check out the latest Bankrate.com survey of interest rates on 30-year
fixed mortgages.
On a 30-year loan, you end up paying thousands of dollars more in interest compared with a
shorter-term obligation, but this interest is 100-percent tax deductible, which reduces your
after-tax cost.
15-Year Fixed Rate
This mortgage also is becoming a common loan because borrowers pay a lower interest rate in
exchange for larger monthly payments. Note, however, that a smaller portion of your monthly
payment goes for interest and therefore the tax deduction is smaller.
With a 15-year mortgage you could get an interest rate that is typically one-quarter to
one-half percent lower than a 30-year mortgage. The shorter the term, generally the lower
the interest. Yet, the main advantage is the fortune in interest you will be saving during
the life of the loan. Check out the latest Bankrate.com survey of interest rates on 15-year
fixed mortgages.
Calculator
To find out what the mortgage principal and interest would be on a particular loan you may
be considering, go to the Bankrate.com Calculate your mortgage payment page.
Example
Let's say you have a $100,000 mortgage. Let's compare how much money you would pay out in
interest over 30 years vs.15 years. The following chart shows the numbers. The monthly loan
payments are principal and interest only. As you can see, with a 15-year loan, you would
save $94,726 in interest.
| Loan term |
Rate |
Mthly. payment |
Total
interest |
| 30 years |
8.00% |
$699 |
$164,155 |
| 15 years |
7.75% |
$941 |
$69,429 |
|
Interest savings: $94,726 |
But there are other factors to consider:
Take the example above: With the 15-year loan, the monthly mortgage payment is $242 more
than the 30-year mortgage. You may want to put that money toward another investment. For
instance, in a bull-market economy, you can make more money investing that $242 monthly in
mutual funds or other investment securities.
Keep in mind that there are ways to prepay your mortgage and whittle away at the principal
each month, so that the loan is paid off sooner than 30 years.
Also, it depends on how long you plan to own the home you are purchasing. If it's less than
five years, you may be better off with an adjustable-rate mortgage, or ARM.