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Mortgage rates » 15 year

Home buying made easy with decrease in mortgage rate in the United States

With the decline in mortgage rates in the United States, more and more people have decided to purchase home. It’s not at all an easy task to search for the right kind of home with such tough competition in the mortgage market. You will have to be very careful when shopping around for home. Checking the mortgage rate is of utmost importance if you want your home buying process to be a successful one. Previously, the mortgage rate was so high that most people could not afford to purchase home. However, the mortgage rate has fallen down at present. The rate for 30 year fixed mortgage is 2.75% while the rate for 15 year fixed mortgage is 2.25% till date. As such, homebuyers who are searching for homes can avail the advantage of this reduction in mortgage rate and purchase their abode without difficulty. Continue Reading…

15 year Mortgage Rate Discussion

Purchasing a house can be a bit daunting for first time buyers. Often times, they are not financially equipped to do so. They still possess a lot debts and liabilities that are draining away their monthly paycheck. And regrettably, quite a few of them do not have much of anything for an egg’s nest let alone to afford a mortgage payment.

Given this situation, they try to engage in ingenious tactics with their mortgages in order to win the pursuit of their dream house. This is the typical scenario in the game called mortgages and home loans under the umbrella of personal finance.

Mortgages may be largely classified into two:

1. Fixed Rate Mortgage (FRM) and Adjustable Rate Mortgage (ARM)

2. Fifteen and Thirty Year Terms

Fixed Rate Mortgage

The FRM, as the name implies, has the characteristic of a constant and stable interest rate throughout the life of the loan. This option gives protection to the borrower in the event of fluctuating rates particularly when the experts predict (or your gut tells you) that an inevitable spike will occur in the coming months. This is a well-adopted alternative for a middle class American family – conventional and concise figures devoid of hidden rate escalations.

From the inception of the loan up to the completion of the obligation, you will know the fixed amount that will be paid during the entirety of the term. An amortization schedule will be provided to guide the borrower on when the payment will be due. (See Table B and C)

With regards to the interest rate that a homeowner will receive, such will be established by looking into variables like credit scores, loan amount to house value ratio, and debt to income ratio. Each lender’s guidelines differ but the average fractions and requirements are: having at least a 580 FICO score, not exceeding 80% loan to value (LTV), and not more than 50% debt to income ratio. Rates oscillate on a daily basis, sometimes even 3 to 4 changes within the same day. Nonetheless, rates are anywhere between 5% – 7%.

Adjustable Rate Mortgage

With the ARM, there is the chance that one’s monthly payment swells or dives depending upon the motion of the rates whether it be upward or downward. This is usually coupled with fixed rate for the initial duration of the term, normally 3 to 7 years. And from there, it will adjust to the current and existing market rate. A borrower will likely see 3/1, 5/1, and 7/1 ARMs. The first number represents the introductory period with fixed rate while the second number corresponds on how often the rates may change each year thereafter. Taking the 3/1 as an example, the interest will be fixed for the initial 3 years and same is subject to change every year from then on.

More often than not, ARM can be very tempting because of the lower interest rate. Take note that the shorter the initial fixed period, the lower the interest rate is. Another attribute that makes ARM enticing is that the risk is mitigated by caps or ceilings. These caps are generally of two types; there is the periodic adjustment cap, which confines the amount that the interest rate can be adjusted between two predetermined periods. And the other is the lifetime cap, which defines the amount that the interest rate cannot exceed under any given situation.

Terms

It is safe to say that most people realize that getting mortgages with adjustable rates and 50 year mortgages are generally not a good idea because attached to these are lofty interest rates and costs that will create further damage in their pocket. One main thing to remember with regards to mortgages is that the quicker you pay such debt, the less interest you’ll have to pay. With this said, a 15 year mortgage rate sounds better than its 30 year counterpart. However, the shorter the term, the higher the monthly payments are.

Now, how will you choose the ideal mortgage term? This will be answered as we go along the discussion. Let’s take this as an example: $300,000.00 is the full amount of the loan and 10 percent has already been paid as down payment.

Table A

Thirty Year Loan

Fifteen Year Loan

$270,000.00 Balance

$270,000.00 Balance

5.63% Interest Rate (Bankrate.com: April 9, 2008)

5.22% Interest Rate (Bankrate.com: April 9, 2008)

$1,555.12 Monthly Payment

$2,166.21 Monthly Payment

$559,843.20 Total Payment After 30 Years

$ 389,917.80Total Payment After 15 Years

$289,843.20 Total Interest Paid

$119,917.8 Total Interest Paid

Interest Savings: 169,925.40

If you want to know how to compute for the monthly payment of your remaining balance, here’s how.

270,000.00 (remaining balance to be paid in the span on 30 years)

x .0563 (annual interest rate for a 30 year loan)

15,201.00 (annual interest amount)

/ 12 (months in a year)

1266.75

Amortization on the first year for a 30 year loan

Table B

Month

Principal

Interest

Total

Remaining Balance

0

270,000.00

1

288.37

1266.75

1555.12

268,444.90

2

289.72

1265.40

1555.12

266,889.80

3

291.08

1264.04

1555.12

265,334.60

4

292.45

1262.67

1555.12

263,779.50

5

293.82

1261.30

1555.12

262,224.40

6

295.20

1259.92

1555.12

260,669.30

7

296.58

1258.54

1555.12

259,114.20

8

297.97

1257.15

1555.12

257,559.00

9

299.37

1255.75

1555.12

256,003.90

10

300.78

1257.34

1555.12

254,445.80

11

302.19

1252.93

1555.12

252,890.70

12

303.61

1251.51

1555.12

251,335.60

Amortization on the first year for a 15 year loan

270,000.00 (remaining balance to be paid in the span on 15 years)

x .0522 (annual interest rate for a 15 year loan)

14,094.00 (annual interest amount)

/ 12 (months in a year)

1174.50

Table C

Month

Principal

Interest

Total

Remaining Balance

0

270,000.00

1

991.71

1174.50

2166.21

267,833.80

2

996.02

1170.19

2166.21

265,667.60

3

1000.36

1165.85

2166.21

263,501.40

4

1004.71

1161.50

2166.21

261,335.20

5

1009.08

1157.13

2166.21

259,169.00

6

1013.47

1152.74

2166.21

257,002.70

7

1017.88

1148.33

2166.21

254,836.50

8

1022.30

1143.91

2166.21

252,670.30

9

1026.75

1139.46

2166.21

250,504.10

10

1031.22

1134.99

2166.21

248,337.90

11

1035.70

1130.51

2166.21

246,171.70

12

1040.21

1126.00

2166.21

244,005.50

In the figures above, one will clearly see the yawning gap between the total payment for a 30 year rate as against the 15 year rate. Also, the additional payment for a 15 year loan may prove its worth in the long run.

Pros and Cons

To reiterate, the goal in game of mortgage is to be able to pay off the loan as quickly as possible without straining your current financial standing – meaning you can comfortably pay the monthly bills and the mortgage. And as stated in the previous paragraphs, the shorter the term, the higher the monthly payments are. And unless you were able to acquire a fixed rate mortgage, you must be certain that you can cope up with the changing interest rates particularly when it swells. The last thing you want is to have to default on it. And if such activity continues, it may even lead to foreclosure.

Often times, frugal individuals choose the 30 year mortgage. However, they fail to see the whole picture. They only see the monthly figures, which is considerably less than the 15 year loan, and not the interest that is coupled with said mortgage. While logic directs that lower interest rates connote lower monthly payments, it appears that certain aspects of the loan have been overlooked. In a span of 30 years, will this be still applicable? If you’re looking to save, then you’re better off with a 15year loan.

You need to ask yourself, will the amount of interest be reasonable after 30 years? How about after 15 years? Here enters the benefit of having a 15 year loan—diminishing the total amount of mortgage cost. As shown in Table A, the interest difference between a 30 year and a 15 year loan amounts to $169,925.40. This only demonstrates the hefty weight of paying a loan with a term of 30 years.

If you opted for a 15 as against a 30 year loan, you will have the benefit of owning your property in half the time due to the fact that you were able to pay off without incurring any default. Another benefit for having a 15 year loan is that even though the term is 15 years, one can still put additional payments if one wishes to do so. If your finances dictate that you can still place a little amount to pay for the mortgage, then by all means go. If you keep this up, you’ll be able to pay off your loan ahead of time. Just make sure that you leave a note saying that the additional be applied in the principal and not the interest.

However, even with these benefits, a 15 year loan also has its downside, which is primarily the higher monthly payment. With this stated, a huge chunk of your monthly paycheck or disposable income will be allotted to mortgage alone. When the inevitable happens or an emergency occurs, one may have no other option but to incur delay or worse default. And everyone knows that failure to pay results to devastating consequences.

A bigger payment may prove to be burdensome for an individual who has not sufficiently prepared oneself for larger payments. Do not force yourself to pay an amount that is clearly beyond your financial means. Unexpected things may transpire. It is better to be financially prepared and take the long term than being barely able to make ends meet with the additional burden coming from a 15 year mortgage.

Generally, with mortgages, the shorter the term, the better. But it is better that you choose a program that matches your financial capacity. Purchase what you can afford with ease, don’t stretch your budget too much to the extent that it puts you in an awkward position or in a financial crisis.