Mortgage types
Different types of mortgage plans
| Type | Features | Pros | Cons | Whom is this mortgage right for |
|---|---|---|---|---|
| 30 year fixed rate | Locks in your rate and protects you if rates rise. Payments are the same each month. Easy to track and monitor. | You are conservative and plan on being in your home a long time (at least 7 to 10 years). This offers the most benefits and flexibility. | ||
| 15 year fixed rate | The rate on a 15-year is lower than that on a 30-year. You pay off your home and become debt-free in 15 years. Easy to track and monitor. | The monthly mortgage payment is higher than with a 30-year mortgage. | If you are a really committed saver and plan to live in your home longer than 10 years, this is a great loan. You can lock in a rate and be debt-free in a decade and a half. | |
| Short-term Adjustable Rate (5 years or less) | Interest rates may be fixed for 6 months to a year. Some of these mortgages have rates that change monthly. | You get a substantial break on the interest rate, so the monthly payment will be much less with this mortgage than with any other loan. | If interest rates go up quickly, you can find yourself having trouble making the payments. | These loans are typically used by people who want to keep their monthly payments as low as possible. They make most sense for those who can handle risk and don’t expect to live in the house more than a few years. A great deal if rates stay low. |
| Intermediate Adjustable Rate (Often called a 3/1, 5/1, 7/1, or 10/1 ARM) | Interest rate locks in for a specific period and then adjusts annually or every six months based on ongoing rates | Relatively low rates. | Your rate is locked only for a limited time. If rates rise, your monthly mortgage payment rises. | Great for a person looking for low rates and lower monthly payments who is not planning on keeping the property very long. The longer you lock in the rate, the higher the payments and the lower the risk. |
Why a 30-year mortgage can make sense
If you lock it when the rates are good, it is a good deal. They lock in a rate for 30 years. Another great thing is that it is relatively easy to carry them.
How you can get ripped off my a 30-year mortgage
Even with all the benefits of a 30-year mortgage, most people get burned on their 30-year mortgages. That is because, you don’t actually want to pay for your home for more than 30 years. Why? Because if you do, you will be debt and paying off your home forever.
Unfortunately, 30-year mortgages end up being more profitable for the bank than for you. The math is simple. Say you buy a home for $250K. If you get a typical 30-year mortgage at 8%, your mortgage payments over the 30 years will wind up totaling about $660K. Think about that. You bought a $250K home and it actually cost you $660K. Where did the extra $410K go? It went to pay the interest on your mortgage - which is to say it went into the bank’s pocket, not into your house.
What makes 30-year mortgages more of a problem for most of the people is that most people live in their homes for less than 10 years. The average is only about five to seven years. If you live in a house for, say, seven years and then sell it, you will have paid down the principal on your mortgage by only about 4%. On average, during the first 10 years of your loan, more than 90% of your payments go to pay interest. What is means is that, tens of millions of Americans with 30-year mortgages are wasting a fortune paying for their homes in this way.
How to save yourself a decade’s worth of work?
Make principal payments faster.