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15-year Fixed-Rate Mortgage or a 30-year Fixed-Rate Mortgage

Feeling Right at Home with Kathy Lyon, Union Bank Mortgage Lender NMLS 413332

What makes more sense financially for you, a 15-year fixed-rate mortgage or a 30-year fixed-rate mortgage? Both loan terms come with both positive and negative features. How do you determine which loan term is best for you and your family? It's all about taking a close look at your own finances.

What are the differences? 
As their names suggest, the main difference between 15-year and 30-year fixed-rate mortgage loans is their duration. If you make your regular monthly loan payments on time every month, you'll pay off a 15-year fixed-rate mortgage loan in 15 years and a 30-year fixed-rate loan in 30 years. There's another big difference between these loans: The average mortgage interest rate on a 15-year loan is lower than it is on a 30-year loan. According to Freddie Mac, during the first week of June 2014, the average interest rate on a 15-year fixed-rate mortgage loan was at 3.23 % and a 30-year fixed-rate mortgage loan was at 4.14 %. Both rates are low, but the rate on the 15-year loan is especially low. Does that mean that a 15-year fixed-rate loan is the best financial choice? Not necessarily.

What are the pros and cons?
The main benefit of a 15-year mortgage loan is that you'll pay far less in interest during the life of a mortgage loan. This can save you thousands of dollars over the life of your loan. For example, if you take out a 30-year fixed-rate loan for $200,000 with an interest rate of 4.14%, you'll pay more than $149,000 during the life of your loan in interest. If you take out the same loan at the same interest rate, but for a period of just 15 years, you'll pay just less than $69,000 in interest over the life of the loan. That's a savings of approximately $80,000 with the 15-year fixed-rate loan. However, this doesn't mean that the 15-year loan is necessarily the best choice for you and your family. Even though a 15-year mortgage loan means less interest paid, your monthly payment for such a loan will be higher than it would be with a 30-year fixed-rate loan.

Why are payments higher for a 15-year mortgage?
It is due to the time that you are given to pay back your loan. In a 30-year loan, the monthly payments are portioned out over a longer period of time. Here's an example: For that 15-year fixed-rate loan of $200,000 at an interest rate of 4.14 %, you'd face a monthly mortgage payment of $1,493.79 (not including taxes and insurance). If you instead took out a 30-year fixed-rate mortgage loan of $200,000 at an interest rate of 4.14 %, you'd pay $971.41 a month (not including taxes and insurance).

So, how do I know which loan term is really better?
The question really comes down to this: Can you comfortably afford the monthly payment that comes with a 15-year fixed-rate loan? If so, then taking out one of these loans might be the better choice because you'll pay less money on interest. However, if you can't stretch your household budget to cover that 15-year monthly payment, a 30-year fixed-rate mortgage loan might be the better choice.

For more information regarding the right mortgage loan for you, please call us today at (870) 460-6400.

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