Posts Tagged ‘25 year’

30 Year vs 15 Year Mortgages

Many times whey people think about mortgages their main focus is on the interest rates, however there are many other factors to consider. Another often overlooked decision is the term of the loan. Many times buyers assume that a 30 year term is the best option for a mortgage term; however, you should examine other terms carefully to see all the advantages of a shorter term mortgage. The title of the article compares a 30 year mortgage term versus a 15 year mortgage term, but there are many other options to suite your needs.

When discussing a mortgage potential buyers tend to focus on how to qualify for the most money and keep their monthly payments as low as possible and what is the lowest interest rate they can get on the mortgage. These are two very important factors, but not the only choices to make.

The term or length of time you will pay back the borrowed money is a very crucial part of a mortgage. Choosing the right term can save you hundreds of thousands of dollars as well as build equity at an accelerated rate.

The longer term you choose the more total interest you will pay and the less equity you will build each month. Sure you will have a lower payment by choosing a longer term, but you have to decide if it’s worth the end result. Choosing a 20 or 25 year term over a 30 year term won’t change your monthly payment a significant amount, but it will save you thousands of dollars in interest.

A real world example
John and Jane want to purchase a $300,000 home. They have 20% to pay down so the remaining balance to finance is $240,000. They have the following options to finance the home

Term     Rate     Payment     Total Interest
30         7%       $1,596        $334,821
25         6.875% $1,677       $263,154
20         6.75%   $1,824       $197,969
15         6.625% $2,107       $139,293

As you can see the savings in interest alone from a 30 year term to a 15 year term is almost enough money to purchase the home again; Almost $200,000 in savings. I realize that the payment is about $500 more per month but their is a happy medium. For example 20 year term is only about $200 more per month and you will still save $136,000 in interest!

So, before you decide what term to choose for your mortgage consider all the pros and cons of each term. Ask yourself, is buying a home on a 30 year mortgage term worth losing hundreds of thousands of dollars?

ARM loan mortgage – Adjustable Rate Mortgage

An adjustable  rate mortgage, commonly refered to as an ARM loan is a loan where the interest rate adjusts periodically based on a variety of indicies. There are different variations of an ARM loan some of which have a fixed rate for a certain period of time such as 3, 5, 7, or 10 years and after that period it turns to an adjustable rate and floats based on certain indicies.

There are also many other forms of an ARM loan including interest only ARM, balloon rate ARM, and negative amortization ARM. All of these types of loans have pros and cons, it’s knowing when to get the appropriate loan at the appropriate time that saves you money.

As mentioned earlier usually there is an initial interest rate for a certain period of time, usually 3, 5, 7, or 10 years. After this time period has expired the interest rate is adjusted based on the certin indicies.  There are caps on ARM loans interest rates which are usually about 5%  on top of the initial interest rate. So if your initial rate was 6% the most it could increase would be to 11% (pretty expensive if you ask me).  There is also usually an option to turn the ARM mortgage to a fixed rate for an additional fee. There is usually a prepayment fee on ARM loans as well.

A great time to consider an ARM loan is when you plan to be in your current home for less than 3 or 5 years and current interest rates are low. You can do an ARM loan for 3 or 5 years and the rate will be fixed for that amount of time and take advantage of the lower rate. When you are ready to move in 3 to 5 years you will be able to sell the house and purchase your next house and start the process over. You won’t even have to worry about the variable or floating interest rate.