Tip: Payment Practices. Depending on the loan, a home buyer who chooses a 30–year mortgage may have the option to make extra payments. In a sense, this enables the borrower to treat the long-term loan like a short-term one.
Source: Bankrate, 2012
When selecting a fixed–rate mortgage, a prospective borrower has to determine how many years to finance to loan. Some financial institutions offer 10- and 20-year fixed–rate mortgages as well as 15- and 30-year fixed-rate home loans.
For the purpose of comparison, this worksheet takes a look at 15-year and 30-year fixed-rate loans.
The payments on a 30-year mortgage are generally lower than 15-year loans, but their interest rates tend to be higher. The lower payment comes from spreading out the loan over twice as many payments. Because of the longer time frame, a 30-year mortgage owner pays more in interest payments than a 15-year mortgage holder.
Fast Fact: Heating Up. Forty percent of borrowers who refinanced a 30-year fixed-rate loan in the third quarter of 2011 opted for 15- or 20-year mortgages — the highest percentage since 2003.
Source: FreddieMac, 2012
A 15-year mortgage is paid off twice as quickly as 30-year mortgage, which allows the home buyer to build equity at an accelerated rate. The payments on a 15-year loan are higher — but they aren’t usually twice as high — as a 30-year loan.
To get a better idea of the differences, take a few minutes and add some numbers to the worksheet on the next page.
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