15 vs 30 Years
Your mortgage term can be just about anything you choose. 15 and 30 year terms are popular these days, although 10 and 20 years also are available.
The shorter the term, the lower the interest rate. But the main attraction of shorter term mortgages is the money you save.
For example on a $200,000 mortgage with a fixed 4.5% rate, you would pay $1013.38 a month for 30 years and $1529.99 a month for 15 years. Over 30 years you would pay $364,816.80 versus $275,398.20 over 15 years, a savings of $89,418.60 or 24.5% in interest.
If you cut a very conservative quarter of a percent off for reducing the lender’s exposure by 15 years, your savings will be nearly 26%.
Adjustable Rate Mortgages (ARM )
ARM’s are mortgages whose rates adjust according to the terms of the contract you made with the lender.
Usually interest rates are fixed for the first 1, 3, 5, 7 or 10 years. After that period is up, rates will be allowed to fluctuate within the limits of your contract with the lender.
Terms are usually 15 or 30 years (although you can negotiate just about any duration you want). There can be a balloon involved.
Because the lender is not taking as big a risk on losing money if interest rates rise, these loans will have a lower initial rate than a fixed mortgage. The lowest rates will be for 1 year ARM’s and will go up accordingly.
Many people will take out an ARM even in period of low rates, such as now, because they get even lower rates and are able to afford more house. However, the borrower is taking the risk that he can still afford the house after the rates are free to rise.
It used to be common for the contract to limit fluctuations to 2% a year. However, 5% swings are becoming more the norm. Depending on what happens to interest rates, you might find yourself priced out of your house. Of course, you could renegotiate if rates start to go back up.
The average homeowner owns his or her house for approximately 7 years. If you plan to move before the initial fixed term of the ARM is up, it’s a good choice. If you plan to stay longer than ten years, a fixed rate might be a better option.
Balloon Mortgage
A balloon mortgage is one that is not completely paid off at the end of its term.
For example, you might obtain a 15 year fixed rate mortgage that allows you to pay less than the normal amortization schedule would call for. At the end of the 15 years, you will still owe a portion of the principal. How much depends on the terms of the contract.
An interest only mortgage is an example of this type of loan. In the case of an interest only loan, the balloon will be the full amount you originally borrowed. rateconnect.ca
