Fixed Rate vs Adjustable Rate
Fixed rate mortgages (FRM) have the same monthly payment for the entire life of your mortgage. Adjustable rate mortgages (ARM) have payments that vary, either up or down, depending on current interest rates. The advantage of an ARM is that the initial rate can be discounted to help make a home purchase more affordable; however, the rate (and your monthly payments) will eventually come up to the market rate. An ARM mortgage is an advantage only if you plan to sell your home within the discounted period, usually 3-5 years.
Mortgage Length: 30 Years vs. 15 Years
For many years the standard mortgage has been based on a thirty-year schedule. However, some home buyers choose a fifteen-year schedule instead, which translates to higher monthly payments but substantial interest payment savings over the entire life of the loan.
As an example, a $200,000 loan at 7% interest would have monthly payments $1,330.60 for thirty years, while the same loan for fifteen years would have monthly payments of $1796.46. Over the life of the home loan, the thirty year mortgage would include $279,016 of interest, while the fifteen year loan would include only $123,578. Clearly, if you can afford the higher monthly payments you should opt for the shorter loan period.
Accelerated Payment Program
Another way to save money is to increase the frequency of your payments; rather than paying monthly you might schedule your payments bi-weekly. This can result in a substantial reduction in the number of total payments as well as in the total interest paid over the life of the loan.
A buy-down means that someone else reduces your mortgage payments by paying some portion of them for you in the initial years of the loan. For example, a relative or even the seller might pay 3% of your payments in the first year, 2% in the second year, and 1% in the third year. This can help you buy a house you might not otherwise be able to afford.
For more information on the basics of home mortgages, ask the experts. We recommend contacting The Mortgage Guys at Spruce Mortgage. Visit them on the web at www.vermontmortgageguys.com.
Questions? Contact us today!