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LESSON 3: TYPES OF LOANS -- FIXED-RATE MORTGAGES
(FRMs)
(continued from previous page)
15-year FRM
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1.
Borrowers build equity much more quickly due to shorter amortization
schedules.
2. Overall interest bills are dramatically
lower than those on longer-term loans.
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1.
Monthly payments can be significantly higher than those on 30-year
loans.
2. Restricts home buyers to smaller
house than they might be able to afford with longer-term loans |
Let's say you want to borrow $100,000. The
following chart shows the difference between what it would cost
to borrow that amount for 15-year and for 30-year terms. We've
excluded any escrow payments since those vary with the cost
of taxes and insurance around the country. |
Total interest paid on a $100,000
mortgage
(15-year vs. 30-year) |
| Loan term |
Rate |
Monthly principal and interest |
Total interest |
| 30 years |
8.00% |
$734 |
$163,841 |
| 15 years |
7.75% |
$941 |
$69,039 |
| With a 15-year term you save... |
$94,802 |
As you can see, you would save almost $95,000
in interest with a 15-year loan. But the monthly payment is
$207 more than the payment on the 30-year loan. You may want
to put that money toward another investment that will appreciate
more quickly than your home. By investing that $207 every month
in an investment yielding 10 percent annually, you'd end up
with $152,967 at the end of 30 years. And, in the first year
alone, a single person in the 28 percent tax bracket would be
able to deduct $1,703 in interest with the 30-year loan, but
only $533 with the 15-year one.
 When
considering a 30-year or 15-year fixed rate mortgage, ask yourself
if you can really afford the payment on a 15-year mortgage.
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"To save money on your mortgage, the
most important task is to get the right kind of mortgage.
I've seen people lose big bucks by getting the wrong kind
of mortgage."
Charlie Kontz, Brookhaven Mortgage, Atlanta |
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