|
A fixed-rate loan having an 8% interest
will yield an 8% return throughout its term (up to 30 years) regardless of what happens
to the cost of money during those 30 years. While interest rates are volatile
and subject to a significant change over the short term, lenders feel the need to
protect themselves by committing their loan funds for shorter terms (such as a 10
or 15 year loan). Another solution would be for the lenders to offer Adjustable Rate Mortgages
(ARM's).
A long-term fully amortized loan has
distinct advantages for the borrower. The equal payments are spread out over
a long period of time keeping the payments manageable and there is no balloon payment
required at the end of the loan term. This type of loan is the most popular
with borrowers mostly because this is the type of loan program that they are most
familiar with.
ADVANTAGES OF A 15-YEAR FIXED-RATE
LOAN:
The 15-year, fixed-rate loan is becoming
increasingly more popular every year. They often have a lower interest rate,
ownership in half the time of a 30-year fixed loan, and fantastic savings over the
life of the loan.
DISADVANTAGES OF A 15-YEAR FIXED-RATE
LOAN:
The two major disadvantages of a 15-year
fixed-rate loan are larger monthly payments, and smaller tax deductions.
The advantages and disadvantages of
a 30-year fixed-rate loan are the opposite of the explanations for a 15-year fixed-rate
loan.
Generally, a 15 or 30-year fixed-rate
fully amortized loan is what most homeowners shoot for until the rates rise to around
8%-9%. At this point the advantages dim in the light of other popular programs
such as 2 to 1 buydowns, and Adjustable Rate Mortgages (Arm's).
Return
to the Mortgage Answers Main page
|
