The most common type of home loan is the fixed-rate mortgage. The interest rate remains the same for the life of the loan, so the principal and interest remain the same, too.
• Main benefit: Monthly payments don’t change. (Unless property taxes, insurance premiums or homeowners or condo association fees change vary.)
• Main drawback: Generally, the interest rate on an adjustable-rate mortgage is lower. (But adjustable rates can go up over time.)
A mortgage’s term is the number of years you have to pay it. You have two main choices: a 30-year term or a 15-year term.
30-year vs. 15-year mortgages
• Pro: For a given loan amount, the monthly payments are lower.
• Cons: You pay more total interest over the life of the loan. The interest rate is higher.
• Pros: You pay less total interest over the life of the loan. The interest rate is lower.
• Con: For a given loan amount, the monthly payments are higher.
The 30-year fixed-rate mortgage is more popular than the 15-year because it provides a lower monthly payment for the same loan amount. This means that if you know how much you can afford every month, you can borrow more money — and get a more expensive home — with a 30-year fixed.
Similar payments, different amounts
Gene can afford about $1,000 a month in principal and interest. Gene can choose between a 30-year fixed with an interest rate of 4.5 percent and a 15-year fixed at 4 percent.
• 30-year fixed at 4.5 percent: $1,013 monthly principal and interest for a $200,000 loan.
• 15-year fixed at 4 percent: $1,013 monthly principal and interest for a $137,000 loan.
For the same monthly payment, Gene can borrow $63,000 more with a 30-year fixed.
But that’s not the entire story. For the same loan amount, you pay more interest with a 30-year fixed.
Same amounts, different interest
For a $200,000 mortgage:
• 30-year fixed at 4.5 percent: $164,813 total interest for the life of the loan.
• 15-year fixed at 4 percent: $66,288 total interest for the life of the loan, or $98,525 less.