Are you buying a new house or looking to refinance before interest rates go up any higher?
Now is a good time to get a home mortgage.
But there are so many products out there, how do you know which one is right for you?
First thing’s first though. Interest rates are going up so throw out any adjustable interest rate mortgages or ARMs.
You might hear it called a 5/1 ARM or something similar. Don’t do it.
That immediately eliminates a lot of product so we can focus on a fixed rate mortgage.
The two most common fixed interest rate products are 15-year mortgages and 30-year mortgages.
So let’s dive in a little deeper.
The 30-Year Fixed Rate Mortgage
According to Wells Fargo, the interest rate for the 30-year fixed rate mortgage is 4.375%.
That assumes you have a credit score above 720. If you don’t, I suggest you read two of my free articles to help you understand the cost of bad credit and how to fix it.
With a 4.375% interest rate and a loan amount of $200,000, you will pay a monthly payment of $998.57 to Wells Fargo.
Side note: none of the payments will include property tax and insurance escrow payments. Those will depend on other factors like location.
At the end of 30 years, you will pay back the $200,000 and a total of $159,485.39 in interest.
That’s a lot in interest so how can we cut that down?
The 15-Year Fixed Rate Mortgage
Now your interest rate is 3.625% and you’ll pay off your home mortgage in 15 years.
You get a .75% lower interest rate because you cut the length of your loan in half.
But is it worth it?
On a loan amount of $200,000, your payment increases to $1,442.07 from $998.57 so it goes up $443.50.
But you pay $59,573.23 in total interest. You pay close to $100,000 less than the $159,485 in interest you would pay on a 30-year fixed rate home mortgage.
That is much better but you lock in your higher payment so let’s look at paying more on a 30-year mortgage.
Making Double Payments on a 30-Year Fixed Rate Mortgage
So let’s go back to our first example. Your payment is $998.57 on a $200,000 loan and your interest rate is 4.375%.
But what if you just pay $443.50 extra per month to pay the same payment as the 15-year mortgage?
Both payments would be $1,442.07.
You would then pay $79,161.32 in interest and and pay off your mortgage in 16 years.
So you pay $19,588 more in interest than a 15-year home mortgage and add an additional year.
But you save $80,324 in interest from the 30-year fixed mortgage and cut off 14 years.
Neither are bad options.
Mathematically the 15-year fixed rate home mortgage wins.
You pay less interest and for less time than the other two options.
However, the 15-year mortgage locks you in to a higher payment.
If you can’t make that whole payment, Wells Fargo will come after you.
If you are paying additional principle on a 30-year mortgage, you can just cut back the extra principle that month.
So the additional $19,588 in interest is a cost for having flexibility.
You can also pay even more additional principle each month a on 30-year mortgage to pay less interest.
Which fixed rate mortgage do you prefer?
P.S. If you are struggling with the idea of paying of your mortgage early, take a look at this free article I wrote.
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