FHA vs CONV – what’s the difference?
30 YEAR FIXED RATE
The 30 years fixed rate mortgage has become one of the most common loans in today’s mortgage lending environment. By definition, it is a loan in which the rate is locked in for the duration (in this case 30years) of the loan. It’s long term and fixed rate makes it attractive to many homeowners. It is at times the best option for many people, but is it YOUR best option?
Is a 30 Year Fixed Rate Mortgage Right For You?
In order to decide whether a 30year mortgage is, in fact, the best fit for you, we ask you to think about the following questions:
Do you want the lowest possible mortgage payment?
Because of its long nature, a 30year fixed rate mortgage will inevitably reduce the number of your monthly payments compared to shorter length fixed-rate mortgages (like a 20 or 15 year fixed rate mortgage). You end up paying more interest over the 30 years, but because the principal repayment is spread over those same 30 years, it will give you a more manageable monthly payment amount.
Is the loan you need for a Purchase or Refinance?
If you are a first-time home buyer or new to making mortgage payments, this mortgage option is a great one. On the other hand, if you’re looking to refinance your current home mortgage and you already have a low rate, a 30-year mortgage may be too long for you. You may want to consider a shorter fixed mortgage term based on how much you can afford and what your mortgage refinancing goals are.
How Long Are You Planning On Staying In Your Home?
This is probably one of the more important questions when it comes to deciding what type of financing is best for you and it will be a question that comes up quite often throughout our website. As a simple rule of thumb, if you’re contemplating getting a 30 year fixed rate mortgage, you should also be planning on staying in your home for more than 4-6 years.
Things to keep in mind…
A 30-year mortgage is an amortized compound interest-bearing loan. What that means is during the beginning years of your newly acquired 30year loan, a significantly large portion of your monthly mortgage payment will go to paying off the interest accrued. As you pay off the loan over time, the amount you pay towards interest (compared to principle) will diminish to the point where most of your payment will go to the principle (Note that your actual mortgage payment is contractual and never changes. Only the amounts that go to principal and interest change). What this all translates to is that on a 30year fixed rate mortgage your principle balance won’t go down very much during the first couple of years, because most of the payment is going to the interest. But as time goes by you start to pay more of the principle and you will see your principle balance decrease much faster to the point of zero at the end of the 29th year.
15 YEAR FIXED RATE
If your goal is to reduce the total interest you pay over the life of the loan, and you can afford a slightly higher monthly payment, lower terms such as 20 or 15 years can reduce interest significantly.
As one can imagine, a 15 year fixed mortgage will have very similar characteristics of that of a 30year mortgage. The main difference is the shorter time allotted to paying off the loan, which consequently results in a saving of the total amount of interest paid throughout the life of the loan. As mentioned above this program is a perfect fit for those that can afford a slightly higher payment and contrary to popular belief the payment compared to a 30year DOES NOT double. The difference in payment in at times is as low as a twenty percent increase to that of a 30year mortgage.
Things to keep in mind…
While the difference between a 30yr interest rate and a 15yr interest rate is significant enough to encourage borrowers to take the less year 15, borrowers must still qualify for that higher payment. There are times when a borrower simply does not qualify. In those cases, keep in mind that any borrower can choose to pay down his/her mortgage as he/she sees fit. While that borrower won’t be able to cash in on the rate difference savings they will certainly save the thousands (sometimes hundreds of thousands) of dollars in interest savings.