Fixed-Rate Mortgage
The interest rate may be your main consideration if you expect to stay in your house for a long time. With a fixed-rate mortgage, you can be sure that your interest rate will stay the same for the entire life of your loan. Fixed-rate mortgages are available in a variety of repayment terms, with 15, 20, and 30 years the most common.
30-Year Fixed-Rate
The easiest fixed-rate loan to qualify for, the 30-year mortgage, gives you an excellent opportunity to keep mortgage payments reasonable by making monthly payments over a long period of time. This mortgage loan may be ideal if you plan to remain in your home for years and wish to keep your housing expense low and use any extra cash for other purposes. This loan also provides maximum interest deduction for tax purposes.
20-Year Fixed-Rate
For those who want a lower interest rate and want to own their homes free of debt sooner, this shorter mortgage amortizes principal and interest over just 20 years, saving a considerable amount of total interest paid over the life of the loan.
15-Year Fixed-Rate
This shorter-term mortgage will save you a significant amount of interest over the life of the loan. By paying off the mortgage more quickly, you also build up equity in your home sooner. This may be important if you are approaching retirement or have other large expenses to cover, such as financing your children’s education. However, the monthly payments you make on a 15-year mortgage will cost you more than those you would make on a 30 or 20-year loan.
Compare Mortgage Loan Terms
| Shorter term (15-year) | Longer term (30-year) |
|---|---|
| Higher monthly payments | Lower monthly payments |
| Typically lower interest rates | Typically higher interest rates |
| Lower total cost | Higher total cost |
What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan?
Simply put, with a fixed-rate mortgage, your interest rate is set when you take out the loan and will not change for the life of the loan. With an adjustable-rate mortgage on the other hand, the interest rate may go up or down.
| Fixed rate | Adjustable rate (ARM) |
|---|---|
| Lower risk, no surprises | Higher risk, uncertainty |
| Higher interest rate | Lower interest rate to start |
| Rate does not change | After initial fixed period, rate can increase or decrease based on the market |
| Monthly principal and interest payments stay the same | Monthly principal and interest payments can increase or decrease over time |
