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This Old House - Do-it-Yourself

30 or 15 Year? You Have More Choices, You Know

Written by Posted On Tuesday, 10 July 2018 13:09
30 or 15 Year? You Have More Choices, You Know Copyright: dolgachov / 123RF Stock Photo

If you're brand new to the wonderful world of home loans, you might be a bit overwhelmed at how many different types of financing options are really out there. There's a fixed rate loan and there's an adjustable rate loan. There's also what is referred to as a "hybrid" loan, which in essence is an adjustable rate mortgage but has an initial period where the rate is fixed for say three or five years before turning into a loan that can adjust once very six months or a year.

If you decide you want a hybrid loan, then you'll need to decide which rate you want to take. Do you want a lower rate and pay a discount point to get that rate or will you opt for the no-point option and take a slightly higher rate? Do you want to lock in that rate right away or wait for a while until you get closer to the closing date? If you want to lock now, how long do you want your lock period to be?

These questions and more will be presented to you by your loan officer and we must admit it can get confusing at times due to the many decisions you have to make. One of the decisions will be how long you want the loan term to be. Is a 30 year fixed rate better or is the 15 year program the wiser choice?

The most popular loan in today's marketplace is the 30-year fixed. Every mortgage company offers it and it's the one most heavily advertised. But what's the attraction with the 15 year term? A 15 year loan will have slightly lower rates compared to a similarly priced 30 year loan. It's just that the payments will be much higher.

Let's look at a $200,000 loan amount and take a sample rate of say 4.25%. A 30 year loan at 4.25% and $200,000 yields a payment of $983. A 15 year loan at 4.125% gives us a $1,491 payment. That's quite a difference and one of the reasons borrowers select the longer term due to the lower payment. Yet the 15 year allure isn't the lower payment, but the lower interest paid.

Over the life of the 30 year loan, there will be $154,196 in interest paid. That's way more than half the original loan amount. With the 15 year, the amount of interest paid falls dramatically to $68,548 and that's why some borrowers choose the 15.

Sometimes however borrowers want the 15 year term but the payments can be so high they no longer qualify. But it's not an "either, or" proposition. Did you know there are other terms? There is a 20 year and a 25 year term. These two choices provide a "middle of the road" option and results in a lower payment than a 15 year but still saves on long term interest.

When speaking with your loan officer about your financing options, if you're just getting quotes for a 30 and a 15 year loan, ask about the 20 and 25 year term. You just might find the perfect balance between payment and long term interest.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

www.cdreed.com

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