Monday, October 15, 2007 11:50 AM
30- vs. 15-year mortgage?
The reason why the 30-year fixed mortgage has always been the most popular is because it usually creates the lowest monthly payments. If interest rates get lower along the way, you can refinance, but otherwise, you’re taking a bet that you’re getting the best available rate now and you just ride it out until retirement and then you’ll own your house free and clear. The main disadvantage, especially when compared to a 15-year fixed mortgage, is that you pay a lot more money in interest to the bank -- it could be more than double over the life of the loan.
So why doesn’t everyone switch to a 15-year mortgage? Because while it would have a lower interest rate and you’d pay less to the bank, your monthly payments would be significantly higher. For most people, the cost difference is substantial enough that taking an extra 15 years to pay it off makes sense. For an easy comparison, plug some numbers into a mortgage calculator, like the ones they have at Bankrate.com and you can see actual cost difference.
The real question to ask, though, is whether or not you should go for the traditional fixed rate mortgage, no matter what the time span. These days, banks offer many creative packages to entice young home buyers. They have offers with adjustable rates (called ARM), reverse payments, interest-only payments and down payment free options, to name a few. Of course, these all have advantages and disadvantages too, especially in a volatile economy, so do a lot of comparison shopping to make sure you find a good deal for you.