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Fixed-Rate Mortgages

The most common type of mortgage loans are fixed-rate mortgages1 for 15-year and 30-year periods.

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30-Year Fixed Rate

The traditional 30-year fixed-rate mortgage has a constant interest rate and monthly payments that never change. This may be a good choice if you plan to stay in your home for seven years or longer. If you plan to move within seven years, then an adjustable-rate loan may be a better option.

Advantages:

  • Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
  • Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
  • Lower monthly payments free up money that borrowers can pour into investments that could potentially yield more than their homes.
  • Higher interest payment increases the amount consumers can deduct at tax time, potentially reducing their federal income tax liabilities.2

Disadvantages:

  • Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
  • The overall interest payment is higher because of the long amortization term.
  • The interest rates are higher than on 15-year loans.

15-Year Fixed Rate

This loan is fully amortized over a 15-year period and features constant monthly payments. It offers all the advantages of the 30-year loan, plus a lower interest rate—and you’ll pay off your loan twice as fast. However, the disadvantage is that, with a 15-year loan, you commit to a higher monthly payment. Many borrowers opt for a 30-year fixed-rate loan and voluntarily make larger payments that will pay off their loan in 15 years.

Advantages:

  • Borrowers build equity much more quickly due to shorter amortization schedules.
  • Overall interest payments are dramatically lower than those on longer-term loans.
  • The interest rates are lower than 30-year loans.

Disadvantages:

  • Monthly payments can be  higher than those on 30-year loans.
  • Payments will be higher than a 30-year fixed rate.
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