Types of Mortgage


Compare Different Terms

A. Longer Terms such as 20 and 30 years :

* Qualify for a larger loan amount.
* Have higher interest rates.
* Pay more interest in total than shorter term loans
* Is a good choice if you don't plan to move or refinance for at least 10 years or if interest rates were low when you locked in the rate.

Advantages of a 30-year Fixed Rate :

* Offers borrowers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
* Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
* Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes.
* Higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liability.

Disadvantages of a 30-year Fixed Rate :

* Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
* The overall interest bill is much higher because of the long amortization term.
* The interest rates are higher than on 15-year loans.

B. Shorter Terms such as 10 and 15 years

* Have lower interest rates.
* Have a shorter period (term) to pay back the principal. Because of the shorter term the monthly payments are higher but more of the payment goes to principal and less to interest.
* Build equity faster.
* Have higher monthly payments – because of which, you may qualify for a smaller loan amount.
* Is a good choice if you want to build equity quickly or you'd rather pay less interest than buy a more expensive home?

Advantages of a 15-year Fixed Rate :

* Borrowers build equity much more quickly due to shorter amortization schedules.
* Overall interest bills are dramatically lower than those on longer-term loans.
* The interest rates are lower than 30-year loans.

Disadvantages of a 15-year Fixed Rate :

* Monthly payments can be significantly higher than those on 30-year loans.
* Restricts home buyers to smaller house than they might be able to afford with longer-term loans.

Example :
Let's say you have a $150,000 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 $117,001 in interest.

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