Mortgage Basics
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mortgage
Fixed-rate mortgages

Lenders offer several types of mortgages, but the most common are fixed-rate mortgages. These loans feature fixed rates and monthly payments, generally for 15-year and 30-year periods.

They're popular because:

1. Consumers balk at the thought of their house payment rising and falling with interest rates.

2. Whenever rates are low, fixed-rate mortgages are very affordable.

Fixed-rate borrowers face one major choice: 15-year or 30? For some, a 30-year loan makes more sense. For others, a 15-year one does. Here are some pros and cons of each.

 

30-year fixed rate
AdvantagesDisadvantages
  • Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
  • Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
  • Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes.
  • Higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liabilities.
  • Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
  • The overall interest bill is much higher because of the long amortization term.
  • The interest rates are higher than on 15-year loans.

15-year fixed rate
AdvantagesDisadvantages
  • Borrowers build equity much more quickly due to shorter amortization schedules.
  • Overall interest bills are dramatically lower than those on longer-term loans.
  • Interest rates are lower than 30-year loans.
  • Monthly payments can be significantly higher than those on 30-year loans.
  • Restricts homebuyers to smaller houses than they might be able to afford with longer-term loans.

 

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