Mortgage Guide

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:

  • Consumers balk at the thought of their house payment rising and falling with interest rates.
  • Whenever rates are low, fixed-rate mortgages are very affordable.

Fixed-rate loan 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.

Advantages of a 30-year fixed rate

  • 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.

Disadvantages of a 30-year fixed rate

  • 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.

Advantages of a 15-year fixed rate

  • Borrowers build equity much more quickly due to shorter amortization schedules.
  • Overall interest bills are dramatically lower than those on longer-term loans.
  • The interest rates are lower than 30-year loans.

Disadvantages of a 15-year fixed rate

  • Monthly payments can be significantly higher than those on 30-year loans.
  • Restricts home buyers to smaller house than they might be able to afford with longer-term loans.

Example

Say you have a $150,000 mortgage. Let's compare how much money you would pay out in interest over 30 years vs. 15 years. The following chart shows the numbers. The monthly loan payments are principal and interest only. As you can see, with a 15-year loan, you would save $117,001 in interest.

Interest cost: 30-year vs. 15 year mortgages

Loan termRateMonthly paymentTotal interest
30 years6.64%$961$196,304
15 years6.10%$1,274$ 79,304
Interest difference: $ 117,001

Other factors to consider

Take the example above: With the 15-year loan, the monthly mortgage payment is $313 more than the 30-year mortgage. You may want to put that money toward another investment. For instance, in a bull-market economy, you can make more money investing that $313 monthly in mutual funds or other investment securities.

Keep in mind that there are ways to prepay your mortgage and whittle away at the principal each month, so that the loan is paid off sooner than 30 years.

Also, it depends on how long you plan to own the home you are purchasing. If it's less than five years, you may be better off with an adjustable-rate mortgage, or ARM.

Compare the rates