Just as you would guess, a 15-year fixed mortgage rate is a loan that charges the same level of interest rates for a period of 15 years. These loans, nevertheless, must adhere to all the requirements set by the Federal Mortgages Association, typically referred to as Fannie Mae and Freddie Mac. Fixed-rate loans in real estate are often defined as the Vanilla Wafers of mortgage loans since they are relatively direct with little or no problems incurred. They are generically designed with a set rate of interest, and the lenders commonly need a down-payment on the mortgage at 5 to 25% of the principal.
Generally, the borrower would save up for the down-payment to avert paying private mortgage insurance, which would cost 0.5% of the loan annually. For instance, if the loan is 400,000, that would mean having to pay an extra $167 monthly towards the interest. There are two elements for each fixed-rate mortgage loan, namely; the principal and the interest. The interest is the amount paid for recompensing the financier for the risks involved in lending you the money. To borrow money, the borrower will spend even more money ironically.
When it comes to fixed-interest mortgage loans, the only varying thing is the term of the loan. The monthly payments can be easily extended from 10 to 40 years, even though the popular loan term options have been the 15 and 30-year mortgages. Over 10% of buyers in the market have used the 15-year mortgage plan in the last decade. More than 60% on the other hand, use the 30-year mortgage loan.
15 vs. 30 Years 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 majority of each payment is put toward interest alone. As the total amount owed decreases, the amount that goes toward interest get smaller, and the amount toward the principal goes up. 15-year mortgages are ideal for banks rather than longer-term loans. The reason for this is that it costs less for short term a 30-year mortgage would come with a high rate of interest.
Borrowers could end up paying less on the Arizona 15 year mortgage as anywhere from 0.25 to 1, and over time, this may add up substantially. The government-supported agencies such as Fannie Mae support these mortgages and levy extra fees known as the loan level price adjustments. If time is a factor, which would imply that the 30-year mortgages are more costly to borrowers. The additional fees typically apply to borrowers who don’t have a good credit score or those who have given smaller down payments or a combination of the above unfavorable reasons.
For the 30 year mortgage, the balance reduces at a much slower rate, which implies that the borrower is effectively renting the same revenue for more than twice the term of the loan. The reason is, for a 30-year loan; the principal does not decrease at the same rate it would for the 15-year mortgage. A higher rate implies that there is a large gap between the two types of loans. If the 15-year mortgage loan is 4%, the borrower using a 30-year loan would have to give more than twice more interest to borrow the same principal.
Using the 15-year mortgage plan to pay off the home saves revenue though it also implies the borrower would have a less disposable income monthly for other financial purposes. There will be less chance of these types of borrowers having built up a cash reserve for months-long emergencies should their revenue source be disrupted. Even fewer are issuing their contributions to social security accounts such as the 401(k) s. Individuals who believe they can afford 15-year loans higher level fees have to take a realistic look at the security of their jobs. 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 save the situation through refinancing is very slim. This would particularly apply to older people who are near retirement. For a 50-year-old, having a 15-year mortgage could mean having to give monthly repayments when they retire, nevertheless, if they had opted for the 30-year rate, then more money would have been saved to place into savings accounts like IRAs and 401(k)s while they are still working. Also, there would be a substantial mortgage interest tax deduction right after they stop working.
Benefits of a 15-year Fixed-rate mortgage
Though aggressive for a fixed-rate mortgage rate, the 15-year mortgage has several benefits for those financially capable.
Lower interest Rates Compared to Most Mortgage Loans
Generally, the 15-year fixed-rate mortgage has lower rates than other types of mortgage loans. The main reason is that it presents fewer risks to lenders. A longer-term implies that the lender is unprotected from the higher risk of the loan not getting completed. More prolonged periods imply 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 certain percentage point that is lower than that provided to the 30-year mortgage. That may not seem noteworthy at face value, but when large principals are taken into account, then that could imply hundreds of dollars less in monthly repayments and thousands of dollars in the long haul.
Home Equity is Built Much Faster
Capital is the difference between the home value and how much the borrower still owes to complete the full ownership. If a borrower has a lot of equity in the home they have a mortgage for that implies they have paid most of the money owed towards its full ownership. There is a great share of the home’s current value which they own. One of the noteworthy ways a borrower can build equity is by paying the principal for the loan. That would imply the owner would need more of their payments to proceed towards the principal rather than the interest of the loan, so they own a bigger part of their home. In the case of the 15-year fixed rate loan, the owner is allowed to pay a higher part for the principal and henceforth build equity much faster from even the initial monthly payment. It is one of the main reasons why the monthly payments in this loan type are a bit higher than other fixed-rate loans. Nevertheless, when it comes to the 30-year mortgage, the opposite applies. On an annual basis, the borrower would pay a higher rate of interest for the first years of the loan meaning equity is built at a much slower pace than normal.
One Gets to Pay Off the property at a Faster Pace.
Borrowers may hear that the Arizona 15 year fixed mortgages are fully amortizing loans. That is a term used to illustrate the process of paying off debts using incremental fee plans. 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, however, is going to leave the borrower in debt for a period of up to 15 years longer. That is 15 years longer using financial institutions.
The interest rate and regular monthly fees stay the same.
With the 15-year fixed-rate mortgage, the principal is repaid along with interest monthly. The interest rate remains the same, considering the loan uses a fixed rate throughout the loan term. There is stability in knowing there is an unvarying payment which is issued monthly. The borrower becomes aware they have a specific amount to pay monthly, allowing them to plan around a particular budget sufficiently. It saves a lot of stress during the long run because one is protected from the risks that are incurred through the increasing interest rates. Irrespective 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 monthly for the next 15 years up to the time they finish repaying the loan.
Drawbacks of the 15-year Mortgage
As much as the interest and equity considerations are eye-catching, there are disadvantages to the 15-year mortgage to consider.
Lack of Savings
Research has revealed that less than 40% of Americans can give a thousand dollars from their savings account. The same percent does not include savings account for college, and the 60 percent with elderly family members have a retirement account. The majority of the ones that do would only get monthly checks of $600, bearing in mind the amount available from their savings. This depicts that the majority of the people do not save at all and the ones who do, save little. By tying oneself to a sizeable monthly requirement 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 weight to rise. Once the payments are not possible, then homes are foreclosed. This happens a lot every other day.
Fewer Tax Benefits
Recent tax laws mean fewer tax filers are listing deductions due to the high standard deductions. Currently, less than 10% of homes are going to tally the deductions. This is pertinent for the ones who have opted for the 15-year mortgage through definition. A lesser interest paid converts to less interest rate being deducted through the tax benefits.
The fact that equity is being built up faster than usual with the 15-year fixed-rate mortgage loan only implies cash is being channeled to the mortgage payments, and less is being used for savings or disposable income for spending. This leaves the borrower significantly exposed to difficulties which may come up during that period. It is possible to handle being cash poor for a short duration, but it is not favorable to do so for years on end because different matters get up which require urgent emergency funds such as sickness and accidents. Insurance can only take you so far, even if you are a hermit.
When Refinancing to a 15-year Mortgage Loan Makes Sense
Mortgage refinancing is a method of reviewing the terms of the first loan so that the borrower can get a new one. It may be the sensible option should it be to reduce the interest rate and it also shortens the time during which the borrower would pay the loan. Before deciding to refinance, however, there are a few things to factor in. Refinancing is wise if you are in a 30 year fixed rate loan or have an interest-only adjustable-rate mortgage. If the scenario is a 30-year mortgage that for some reason has high interest, the achievements that you will make by refinancing to a 15 year fixed rate loan are apparent. It could imply a tad higher payment in general, 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.
It is evident that the 15-year mortgage can save you a lot of money. The combined impacts of faster amortization and the lower rates of interest would imply a difference of over $100,000 for the interest in 15 years compared to the 30-year term. With that, there are high risks since the 15-year loan means the borrower should have another cushion in the event of catastrophe because the payments cannot afford to be affected during this time.
Nevertheless, it is a dicey move that would pay off sooner, and it all depends on the financial situation of the borrower. A family with a higher financial ability should take on the 15-year mortgage, but low-income borrows are encouraged to go for other alternatives. Our Arizona mortgage pros will assist you with any question that you might have on the Arizona 15-year fixed rate mortgage. Feel free to contact us today.