How to choose among types of FRMs?

Fixed-rate mortgages are very popular because the interest rate and monthly payments are constant. Fixed loans are generally amortized over ten, fifteen, twenty or thirty years. In recent years, lenders have started offering 40 year mortgages in response to higher home prices.

A fixed-rate mortgage is generally preferred when the interest rate is relatively low and you intend to keep the property for more than five to seven years. When rates are relatively high, or if you intend to sell the property in fewer than five to seven years, adjustable rate loans are generally preferred.

The most common fixed rate mortgage is the thirty-year fixed. Borrowers who want to pay off their loan sooner may opt for a fifteen-year mortgage. If you are trying to decide between a thirty-year and a fifteen-year loan, consider the following:

  • Paying your loan over fifteen years can save you thousands of dollars in interest. Paying less interest results in less of a tax deduction. Determine in advance if a larger tax deduction (with a thirty-year loan) will offset the benefits derived from paying less interest (with a fifteen-year loan).
  • The payment on a thirty-year loan can be substantially less than the payment on a fifteen-year loan of the same amount. You could obtain a thirty-year loan and invest the difference in mutual funds, stocks, CDs, etc. If you could earn a higher, after-tax rate on your investment than the rate you pay on your mortgage, it may be advantageous to invest the difference.

The final decision you make will depend on your preferences. If your goal is to live debt free, then a fifteen year mortgage may be right for you. If your goal is to keep your monthly payments low, a thirty year loan may be best for you.