Wise consumers are fleeing the insecurity of the adjustable rate mortgage (ARM) loan for fixed-rate loans. According to the latest mortgage application data from the Mortgage Bankers Association (MBA), borrowers are clearly choosing fixed-rate loans over adjustable rate loans – less than 7 percent of the total applications were for adjustable-rate loans. That leaves the vast majority of borrowers, whether refinancing or getting a new loan, choosing a fixed-rate loan for their purchase or refinance. Borrowers choosing fixed-rate loans will typically select a 30-year fixed-rate mortgage, but depending on your situation and needs, it could save you thousands to also “run the numbers” on a 15-year loan.The reasons many consumers choose a 30-year mortgage is because it will give them the highest buying power because it is the lowest monthly payment. These lower payments can free up money that you can pour into savings and other investments. The disadvantages to a 30-year mortgage versus a 15-year is that equity is built at a slower pace because payments during the first several years go largely toward interest rather than principal. This may not be a problem in areas with faster appreciation or when you plan to stay in your home for 7 or more years. Over the life of the loan you will also pay thousands more in interest in a 30-year loan, but the interest you do pay can be deducted at tax time each year, thereby reducing federal income tax liabilities.A 15-year loan has the advantages of saving thousands in interest over the life of the loan and also has a lower interest rate. Traditionally, your home is a safe vehicle for building personal wealth and the quicker you build the equity the faster the wealth can grow. Because payments are qualified as a percentage of monthly income, the drawback of the 15-year loan is that the higher payment can restrict you to a less expensive house than you might be able to afford with a longer term loan with lower monthly payments. The following illustration shows how some loan options could help you whether considering a new mortgage or refinancing.
*30 Year Loan Term on $165,000 at 6.5% interest is a monthly payment of $1,042.91 with a total interest of $210,411 over the life of the loan.
*15 Year Loan Term on $165,000 at 5.99% interest is a monthly payment of $1,391.47 with a total interest of $85,465 over the life of the loan.
Potential Saving from Refinancing
*30 Year Loan Term on $165,000 at 5.0% interest is a monthly payment of $885.76 with a total interest of $153,870 over the life of the loan.
* 15 Year Loan Term on $165,000 at 4.75% interest is a monthly payment of $1,283.42 with a total interest of $66,016 over the life of the loan.
This past month, rates have been hovering around 5. Now is an excellent time to look into refinancing your mortgage with a 30 or 15-year fixed. Depending on your monthly savings at our incredibly low interest rates it is not always true that you need to stay in your home for 2 more years to make a refinance a good idea. A mortgage advisor can analyze the amount of time you need to remain in your house to recoup the refinance charges and determine if it is the best plan for you right now. Let me know if you need the name of a trusted mortgage advisor – I have several.
*Interest rates used in these examples are fictional and for illustration purposes only and do not indicate any advertisement of an interest rate, please contact your lender to further discuss current rate information.