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Mortgages

If you make the decision to buy a home using a mortgage you will have to decide where you will get the loan and what type of loan you will get. In this lesson we will look at several available options.

15-year or 30-year

One decision you will have to make is how long do you want or need to have the mortgage for. The most common choices are 30-year loans and 15-year loans.

  • A 30-year loan will have a lower monthly payment or it can allow you to purchase a more expensive house for the same payment as you would have for a 15-year loan.
  • A 15-year loan will be paid off faster, saving you money in interest, and building equity faster.

There is not always a right or wrong choice when making this decision but you will want to consider your own personal situation. Things like your income and age will play into the decision. For example, a 60 year old may not want to take out a 30-year loan.

Calculating Mortgages using a Mortgage Calculator

Open Calculate Mortgages using a Mortgage Calculator in a new tab


Comparing Monthly Costs

Sometimes just comparing the actual payments will be enough to help make the final decision between getting a 15-year mortgage or a 30-year mortgage.

Example #1

A mortgage of $200,000 at 4% interest will have approximately the following monthly payments:

  • 15-year loan: $1,479.38 per month
  • 30-year loan: $954.83 per month

You will pay $524.55 more each month with the 15-year loan.

Comparing Overall Costs

You will also want to look at the overall cost between a 15-year mortgage and a 30-year mortgage.

Example #2

A mortgage of $200,000 at 4% interest will wind up costing the following approximate amounts:

  • 15-year loan with a $1,479.38 monthly payment
    (15 years)(12 months)($1,479.38 per month) = $266,288.40 total overall cost

  • 30-year loan with a $954.83 monthly payment
    (30 years)(12 months)($954.83 per month) = $343,738.80 total overall cost

You will pay $77,450.40 more overall with the 30-year loan.

Fixed Rate vs. Adjustable Rate

You will also need to decide whether you want a fixed rate loan or an adjustable rate loan.

  • A fixed rate loan will have a set rate as well as a set payment. This can make budgeting easier. A disadvantage to this type of loan is that you will still have that rate and those payments even if the overall rates available by lenders fall a great deal. Your only option will be to refinance and pay the finance charges to get a better rate.

  • A variable rate loan will have varying rates which will cause the payments to vary as well. These normally start off at a lower rate with lower payments but this can change quickly. A positive aspect of this type of loan is that if overall rates drop, your rates and payments will drop without the trouble and expense of refinancing. This is normally considered a good choice for someone that does not plan to hold onto the property for a long period of time. A disadvantage is that your rates and payments can increase significantly in a short period of time, which can put a strain on your finances.

Some questions that can help you decide which of these is the best for you are:

  • How long do you plan to keep the property?
  • What is the financial market like? Are rates high with a probability of dropping or are they low with a probability of rising?
  • How often can the rates change on the adjustable rate loan and, if there are limits to how much it can change, what are they?
  • If you see a significant increase in your rates and payments, will you still be able to make the payment?

VA and FHA Loans

You will also need to shop around for the lending institution you will be using. You will want to compare rates as well as finance charges. You also will want to see if you qualify for a government sponsored mortgage such as a US Department of Veteran Affairs (VA) loan or a Federal Housing Administration (FHA) loan. These loans can offer lower down payments and may approve people with lower credit scores.

To qualify for a VA loan you must meet at least one of the requirements below:

  • have at least 90 days of active service in wartime
  • have at least 181 days of active service in peacetime
  • have at least 6 years in the National Guard or Reserves
  • be a spouse of a service member who died in the line of duty or as a result of a service-related disability

To qualify for a FHA loan you have to meet the following requirements:

  • have a certain debt to income ratio
  • have verifiable income and employment
  • prove you are a legal resident of the U.S.
  • have a credit score above 500

Comparing All Options

It is a good idea to compare different options and see how they will affect you financially.

Example #3

You will be borrowing $175,000 for a home. Look at the following options.

Amount Financed Term Rate Estimated Monthly Payment
$175,000 30 year 3.82% $817.42
$175,000 15 year 3.82% $1,278.73
$175,000 30 year 4.32% $868.08
$175,000 15 year 4.32% $1,322.70

The best option for you will depend on a variety of factors, so we'll need more information before deciding which of these loans is the best one!