The most common type of home loan is the fixed-rate mortgage. The interest rate remains the same for the life of the loan, so the principal and interest remain the same, too.
Monthly payments don’t change.
(Unless property taxes, insurance premiums or homeowners or condo association fees change.)
Generally, the interest rate on an adjustable-rate mortgage is lower.
(But adjustable rates can go up over time.)
A mortgage’s term is the number of years you have to pay it. You have two main choices: a 30-year term or a 15-year term.
30-year vs. 15-year mortgages
- For a given loan amount, the monthly payments are lower.
- You pay more total interest over the life of the loan.
- The interest rate is higher.
- You pay less total interest over the life of the loan.
- The interest rate is lower.
- For a given loan amount, the monthly payments are higher.
The 30-year fixed-rate mortgage is more popular than the 15-year because it provides a lower monthly payment for the same loan amount. This means that if you know how much you can afford every month, you can borrow more money — and get a more expensive home — with a 30-year fixed.
Similar payments, different amounts
Gene can afford about $1,000 a month in principal and interest. Gene can choose between a 30-year fixed with an interest rate of 4.5 percent and a 15-year fixed at 4 percent.
30-year fixed at 4.5 percent: $1,013 monthly principal and interest for a $200,000 loan.
15-year fixed at 4 percent: $1,013 monthly principal and interest for a $137,000 loan.
For the same monthly payment, Gene can borrow $63,000 more with a 30-year fixed.
But that’s not the entire story. For the same loan amount, you pay more interest with a 30-year fixed.
Same amounts, different interest
For a $200,000 mortgage:
30-year fixed at 4.5 percent: $164,813 total interest for the life of the loan.
15-year fixed at 4 percent: $66,288 total interest for the life of the loan, or $98,525 less.
Compare the rates
To find out what the mortgage principal and interest would be on a particular loan you may be considering, use Bankrate’s tools to find the best rates in your area, then proceed to our mortgage calculator.
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