After you have picked the perfect home at the ideal location and you have haggled the price as much as you can, you need to face the nitty-gritty.
You need to sit down with your mortgage broker and look at your options. In Tempe and other cities, there are multiple options for the loan term and the rates. One of the loans most explored is the 15-year fixed rate mortgage.
The 15 Year Fixed Rate Mortgage
Simply put, the 15-year mortgage means you will complete the payments in 15 years and the house will be yours, as long as you will settle all the scheduled payments faithfully. To make the computations simple, they employ a fixed rate for the entire term. They will get the loan amount and add the entire interest for the whole duration of the term. After they come up with the whole amount, including the interest, they will compute the fixed monthly payments.
A fixed rate term has the benefit of having fixed monthly payments, so you would know exactly how much you need to pay.
Why not the 30-month option?
One of the more popular options for younger homebuyers is the 30-month fixed term. They choose this option because it has lower monthly payments. The principle is the same, but this time, they need to apply the interest for 30 months, which could drive up the total amount that you need to pay.
There are many financial advisers that would not recommend this option because it’s not the best in terms of overall financial viability.
Let’s Talk Numbers
It would be easier to illustrate the difference between the 15-year and the 30-year term if we check the actual numbers. For example, if you have a $200,000 mortgage on a 30-year fixed rate of 3%, the monthly amortization is pegged at $843.21. If you take the same rate on a 15-year term, that will increase slightly to $1381.16.
The difference between the monthly amortizations amounts to a little over $500. However, you have to pay the amount twice. If we would show the difference, the whole amount of the amortizations for the 15-year term is $248, 609.39. If you compute the amortizations on a 30-year term, the amount that you have paid is $303, 554.90. That means choosing the 30-year term would make you pay almost $55,000 more.
We must note that these computations were based on the same interest rate. That does not necessarily apply in real life, because mortgage companies usually assign higher interest rates on loans with longer terms. It is not often that they offer the 15-year mortgage and the 30-year mortgage at exactly the same rate, which means the gap between the total amount paid is higher.
Any loan shorter than the 15-year term would entail a high amortization amount. It might be too much of a burden for the younger borrowers. If you can get a promotion along with a raise, the amortization will not be too heavy to shoulder.
The key to a good mortgage is balance and fit for the buyer. The personal circumstances of every buyer differ, like those who are confined to take the lowest amortization. The 15-year fixed rate loan, however, is the middle ground that financial advisers believe would be the most equitable.