After the housing bust and mortgage meltdown, the only thing that home buyers were interested in seeing was a 30 year conventional fixed rate mortgage.
It didn’t seem to matter what the best loan for the client was, a 30 year fixed rate was the one being offered and taken most often. That has changed some now with some loan officers making other loans part of their suggestions, but the 30 year fixed still remains the standard.
In some cases, the 30 year fixed rate is the best loan for the client, in other cases it isn’t. Let’s dissect the various other fixed rate options and some variations.
30 year conventional fixed rate
For most people, this will continue to be the best option, depending on credit score, down payment and income. For instance, a lower credit score with minimum down payment may make FHA a better option, but a lower down payment with high credit score could make this a better option than FHA. Read this article for comparisons.
The 30 year fixed program gives the buyer the stability of knowing their payment (except for taxes and insurance) will not go up above the start rate. Also, if monthly mortgage insurance is included, the payment will actually drop along the way.
20 year conventional fixed rate
The 20 year fixed rate is generally a little bit less expensive as far as interest rate than the 30 year and is a great option for those that want to pay off their mortgage in a shorter period of time. The amount of savings by paying a loan off in 20 years versus 30 years can be fairly substantial. The 20 year term makes the payments a bit more “user-friendly than the 15 year term.
Normally the amount of interest savings on the 20 year is not as substantial as what you will find on the 15 year.
15 year conventional
For those that want to own their home in a short term and also want to save significantly on their interest rate, the 15 year conventional is a great way to go. Interest rates for 15 year term is generally 1/4 to 1/2 percent better than the 30 year fixed.
The 15 year term is also excellent for someone refinancing a higher rate 30 year fixed rate. Sometimes the new payment is not significantly higher than the existing payment and pays of years sooner.
One thing to take into consideration is comfort of payment on the short term mortgage loans. If you are stretching your budget to get the shorter term, it is often best to take the longer term and make additional principal payments as you can, thereby saving interest and paying the loan sooner. Don’t stretch yourself to the point of breaking.
About the author: Fred Chamberlin is a senior loan officer with Guild Mortgage Company in Oak Harbor. He has been in the mortgage origination business for over 20 years and in the lending business for over 30 and authors a number of mortgage related blogs.