There are two types of mortgages with regard to interest rate: a fixed-rate mortgage and an adjustable-rate mortgage (ARM). With fixed-rate mortgages versus ARMs, your interest rate stays the same throughout the life of the loan instead of potentially fluctuating. With an ARM, the interest rate adjusts throughout the loan term. ARMs are usually only 30-year loans, while fixed-rate loans have various term options for borrowers. Most fixed-rate mortgages will have a 30-year or 15-year term, though some lenders offer 20-year terms and others even allow borrowers to choose their term.
Home buyers should consider all home loan options before committing to a mortgage. Next, we’ll take a closer look at these products to gain a better understanding of each.
15-Year Mortgage
Some home buyers may opt for a 15-year mortgage because of one major factor: total interest paid. With a shorter mortgage term, a borrower pays off the loan quicker. That means they’ll pay less total interest because they’re paying interest for half the amount of time as a 30-year home loan. Additional benefits to paying the loan off faster is that homeowners will build equity faster and own their home free and clear much sooner.
While a 15-year mortgage has its advantages, many homeowners shy away from this type of loan. It can save borrowers a lot of money in the long run, but it comes with higher monthly payments.
30-Year Mortgage
As mentioned, the 30-year mortgage is the most common home loan term in the U.S. With this mortgage, borrowers have 30 years to pay the loan off, along with a fixed or adjustable interest rate.
Because the payment is spread out over the maximum amount of time, the 30-year mortgage has the lowest monthly payment among all term-length options. However, since you’ll be paying the longest amount of time, you’ll likely pay the most in total interest.
20-Year Mortgage
For borrowers who don’t want a 30-year mortgage but think the monthly payment on a 15-year mortgage is a little tight, a 20-year mortgage could be a good compromise. While the standard option for 20-year mortgages is a conventional loan, they’re also available as VA and FHA loans.
With a term length between a 15-year and 30-year mortgage, you can find some middle ground. But how do you decide between a 20-year and a 30-year mortgage? One advantage of 20-year mortgages is that they have a lower interest rate than a 30-year mortgage and will help you save on overall interest paid over time. However, you won’t save as much in interest as you would with a 15-year loan. And, while 20-year mortgages have a lower monthly payment than a 15-year and therefore offer more financial flexibility, they still have a higher monthly payment than a 30-year mortgage.
YOURgage®
Rocket Mortgage® has a loan option called YOURgage, which allows you to choose a fixed-rate term of anywhere from 8 – 29 years. This loan is more customized to a homeowner’s financial goals and can give them some control over their monthly payment amount.
