During a home purchase it might feel like you are being guided a little too well and aren’t making any decisions for yourself.
You have options! At least, you probably have options. A loan officer might just sign you up for a 30-year fixed loan without asking you if that is what you wanted. There is nothing wrong with 30-year loans. But understanding and deciding for yourself is a good idea. Knowledge is power.
Understanding the difference between 30-yr and 15-year mortgages.
30-Year Mortgage Pros:
- Lower Payment! Stretching the payments over this amount of time will result in significantly lower payments every month. You can expect to save $220/month on a $100k loan.
- More buying power. A $244k house with a 30 year mortgage has very similar monthly payment to a $167k house with a 15-year mortgage.
15-Year Mortgage Pros:
- Lower Interest Rate. 15 year mortgages have significantly lower interest rates than 30-year mortgages. If a 30-year rate is at 4.12%, you can expect a 15-year to be at 3.36%. That means less money is going towards interest and more towards paying off the house.
- Quicker equity growth. The higher payment and lower interest rate goes to good use and pays off your house 15 years earlier!
Understanding the difference between fixed rate loans and balloons.
Fixed-rate: Your balance will be paid by the end of the term. That is the way they are constructed. If you have a 15 or 30-year fixed mortgage you can keep that loan, at that interest rate, until the entirety of your loan is paid.
Balloon Mortgages: Balloon mortgages require your balance to be paid in full at the end of a short term. Typically 5-years. If you don’t have the money to pay it off, you will need to refinance. The risk here is that there is no guarantee interest rates will be reasonable in 5 years.
If you are only offered a Balloon Mortgage, shop around! There might be another bank that will loan to you on a fixed-rate!