The 15-year fixed rate mortgage is a loan which charges interest rates at the same level for a time of 15 years. These loans meet the regulations set by the Federal National Mortgage Association, usually referred to as Freddie Mac and Fannie Mae. Fixed rate loans in real estate are sometimes referred to as the Vanilla Wafers of mortgage loans because they are relatively straightforward with little or no complications involved. They are generically structured with a set interest rate, and the lenders usually require a down-payment on loan at 5 to 25% of the principal.
Usually, the borrower would save up for the down-payment to avoid paying private mortgage insurance, which would cost 0.5% of the loan every annum. If the loan is 400,000, that would mean having to pay an extra 167 dollars every month towards the interest. There are two elements for each fixed rate mortgage loan, and these would be the principal and the interest. The interest is the amount paid for compensating the lender for the risk of lending the borrower the money. To borrow revenue, the borrower has to spend even more money ironically. The only thing which is varying when it comes to fixed-rate mortgages is the mortgage term length. The monthly payments can be easily stretched from a decade to 40 years, even though the common term alternatives have been the 15 and 30-year mortgages. More than ten percent of buyers in the market have used the 15-year mortgage approach in the last decade. More than 60 percent use the 30-year mortgage loan.
15 vs. 30 year fixed rate mortgage
As the monthly fee is set in stone, the portion going towards paying interest and the one meant for the principal changes over time. At the start seeing as the loan balance is high, a lot of the payments given are for the interest. As the balance becomes smaller, the interest reduces, and the principal required goes up. The 15-year mortgages are favorable for banks rather than longer-term loans. Because it costs less for short term a 30-year mortgage would arrive with a high-interest rate. Consumers may end up paying less on the Florida 15 year mortgage as anywhere from 0.25 to 1, and over time, this may add up significantly. The government supported agencies such as Fannie Mae support these mortgages and impose additional fees known as the loan level price adjustments. If time is a factor, that would mean the 30-year mortgages are more expensive. The additional fees usually apply to the borrowers who do not have good credit or those who have given smaller down payments or a combination of the above unfavorable factors.
For the 30 year loan, the balance shrinks at a slow rate, which means the borrower is effectively renting the same revenue for more than twice the length of time. The reason is for a 30-year loan; the principal does not reduce at the same rate it would for the 15-year mortgage. A higher rate means there is a large gap between the loans. If the 15-year mortgage loan is 4 per cent, the borrower using a 30-year loan would have to provide more than two times more interest to borrow the same principal.
Using a 15-year mortgage to pay off the home saves revenue though it also means the borrower would have less disposable income every month for other financial goals. There will be less chance of these borrowers having built up cash for months-long emergencies should their revenue source be disrupted. Even fewer are issuing their contributions to social security accounts like 401(k)s. Consumers who believe they can afford 15-year loans higher level fees have to take a realistic look at their job security. They may qualify for the 15-year mortgage presently but if something happens later and the payments cannot be sustained there is not going to be enough money to qualify to refinance for a 30-year mortgage which would come with lower regular fees. So if the 15-year loan goes sideways, then the chance to salvage the situation through refinancing is slim at best. This would especially apply to older people near the age of retirement. For a 50 year old, having a 15 year mortgage could mean having to give monthly payments when they retire, however, if they had gone for a 30 year rate, then more money would have been available to place into savings accounts such as IRAs and 401(k)s while they are still working. Similarly, there would be a significant mortgage interest tax deduction right after they retire.
Advantages of a 15 year fixed rate mortgage
Though aggressive for a fixed rate mortgage rate, the 15-year mortgage presents several benefits for the financially able.
Lower interest rates as compared to most mortgage loans
On average, the 15-year fixed rate mortgage arrives with lower rates than other mortgage loans. Reason being it presents less risk to the lender. A longer term means the lender is exposed to a higher risk of the loan not getting completed. More prolonged periods mean more time during which accidents, illnesses, financial crashes and layoffs may occur. With the 15 year mortgage, the borrower gets an interest rate up to a percentage point lower than that provided to the 30-year mortgage. That may not seem significant at face value, but when large principals are taken into effect that could mean hundreds of dollars less in monthly payments and thousands of dollars in the long run.
The interest rate and regular monthly fees stay the same
For the 15-year fixed rate mortgage, the principal is repaid along with interest every month. The interest rate stays the same, considering the loan uses a fixed rate throughout the life of the loan. There is stability in knowing there is a regular payment which is issued every month. The borrower becomes aware they have a specific amount due each month, allowing them to plan around a particular budget adequately. It saves a lot of stress during the long run because one is protected from the risk incurred via the increasing interest rates. Regardless of what is going on within the housing market, if the monthly payments are at a set rate for the fixed mortgage rate, then the borrower is only obligated to pay that figure each month for the next 15 years up to the time they complete the loan.
Home equity is built much faster
Capital is the difference between the value of the home and how much the borrower owes to complete the full ownership. If a person has a lot of equity in the home, they got a mortgage for, that means they have paid most of the money owed towards its full ownership. There is a great portion of the home’s current value which they own. One of the significant ways a person builds equity is through paying the principal for the loan. That would mean the owner would need more of their payments to proceed towards the principal rather than the interest of the loan, so they own a higher percentage of their home. In the case of the 15-year fixed rate loan, the owner is allowed to pay a higher percentage for the principal and hence build equity faster from even the first monthly payment. It is part of the reasons why the monthly payments are a bit higher than other fixed rate loans. However, when it comes to the 30-year mortgage, the opposite applies. On an annual basis, the borrower would pay a higher interest for the initial years of the loan meaning equity is built at a much slower pace than usual.
One gets to pay off the property at a faster pace
The borrower may hear Florida 15 year fixed mortgages are fully amortizing loans. That is a term to claim to illustrate the process of paying off debt using incremental fee schedules. If one makes the scheduled monthly payments on the 15-year loan, then the mortgage may be cleared by the 15 years. A 30-year mortgage though, is going to leave the borrower in debt for a period of up to 15 years longer. That is a decade and a half longer at the hands of financial institutions.
Disadvantages of the 15-year mortgage
As much as the interest and equity considerations are attractive, there are drawbacks to the 15-year mortgage to consider.
Lack of savings
Surveys have shown that less than less than 40 per cent of Americans can issue a thousand dollars from their savings account. The same per cent does not have a savings account for college, and the 60 per cent with elderly family members have a retirement account. The majority of the ones that do would only get monthly checks of $600, considering the amount available from their savings. This serves to show that the majority of the population do not save at all and the ones who do, save little. By tying oneself to a sizeable monthly obligation in the name of mortgage payments to save money, in the long run, would be playing a dangerous game because a lot can happen in 15 years that would cause the financial burden to increase. Once the payments are not feasible, then homes are foreclosed. It happens every day.
Fewer tax advantages
Recent tax legislation means fewer tax filers are itemizing deductions because of high standard deductions. Currently, less than ten per cent of homes is going to enumerate the deductions. This is pertinent for the ones who have opted for the 15-year mortgage through definition. A lesser interest paid translates to less interest being deducted via tax benefits.
The fact that equity is being built up faster than usual with the 15-year fixed rate mortgage loan only means cash is being redirected to the payments and less is being used for savings or disposable income for expenditure. This leaves the owner significantly exposed to problems which may come up during that time. It is possible to sustain being cash poor for a slight duration, but it is not favourable to do so for years on end because different matters arise which require urgent emergency funds such as sickness and accidents. Insurance can only take one so far, even if they are a hermit.
When refinancing to a 15-year mortgage loan makes sense
Mortgage refinancing is a way to revise the terms of the first loan so that the borrower can have a new one. It may be the advisable option should it be to lower the interest rate and it also shortens the term during which an individual would pay the loan. Before deciding to refinance, though, there are a few things one needs to know. Refinancing is advisable if the person is in a 30 year fixed rate loan or has an interest only adjustable rate mortgage. If the scenario is a 30-year mortgage that for some reason has high interest, the gains that one makes through refinancing to a 15 year fixed rate loan are apparent. It could mean a slightly higher payment on average, though it is not worth the effort if the home is paid off in advance and the borrower saves thousands of dollars during the process.
A 15-year mortgage can save the borrower a lot of money. The combined effects of faster amortization and the lower interest rates would mean a difference of more than $100,000 for the interest in 15 years compared to a 30-year term. That being said, there are high risks because the 15-year loan means the borrower should have another buffer in the event of catastrophe because the payments cannot afford to be affected during this time. It is a risky move that would pay off sooner, and it all depends on the situation of the borrower. A family with a higher financial ability should take on the 15-year mortgage but low-income buyers would be advised to go for the alternative options.