Pickup trucks are the best-selling vehicles in America. But if you’re a city-dwelling businessman or a kid-carrying soccer mom, it’s probably not the right fit for you. Mortgages are the same way: one style does not fit all.
So here’s a rundown of three popular mortgage types to help you choose the one that best fits your lifestyle – and finance.
15-Year, Fixed-Rate Mortgage (FRM)
Does having no mortgage payment during your golden years sound good? Probably, and that’s one potential benefit of choosing a 15-year FRM rather than the more common 30-year loan. Many people use the shorter term to lower their financial obligations during retirement, when they’ll be on a fixed income.
Another great feature is that, typically, a 15-year FRM will have a lower interest rate than a 30-year FRM. That, combined with the shorter term, means you’ll save a lot in interest over the life of the loan.
Just how much? Let’s compare two $300,000 mortgages. One is a 30-year FRM featuring a 4% interest rate (APR); the other is a 15-year FRM with a 3.5% APR. In this case, opting for the 15-year would save a whopping $106,205 in interest over the life of the loan.
Now, before you get too excited about all that gold for your golden years, remember that because you’re paying off the loan more quickly, you’re monthly payment will be higher. About $594 in our scenario. After all, everything comes with a price.
Who It’s Best For: If you can handle a little higher payment in order to pay off your home sooner and save a lot in interest, compare 15-year mortgages for free at LendingTree.com.
5-Year Adjustable Rate Mortgage (5/1 ARM)
You may have heard scary stories about adjustable rate mortgages. And to be sure, used irresponsibly, these can lead to trouble. But used properly, these mortgages can save you a lot of money.
Here’s how a 5/1 ARM works: The initial interest rate is very low – we’ve seen recent rates as low as 2.75% (2.89% APR). That initial rate doesn’t change for five years, then the rate adjusts every year based on a defined index. There is usually a maximum it can inflate each cycle, and it could even go down, but your monthly payment fluctuates with it.
So if the rate goes up, so does your monthly payment. But if you know you’ll sell your home within five years, before it adjusts, you can save a lot.
To see how much we compared another two $300,000 mortgages. This time, a 5/1 ARM with a 2.89% APR (at 2.9%) to our previously mentioned 30-year FRM (4% APR). In those first five years, the 5/1 ARM saves nearly $11,110. Now, that’s not such a scary story.Who It’s Best For: If you’re planning to sell your home within five years and want to minimize the interest you pay during that time, shop 5/1 ARMs at LendingTree.com for free.
30-Year, Fixed-Rate Mortgage (FRM)
This mortgage is the most popular for a few reasons. First, it offers something super attractive: the security of knowing your monthly payment will never change.
And even though it may have a higher interest rate than a 15-year or the initial rate on a 5/1 ARM, 30-year interest rates are still historically low.
Finally, spreading the payments out over 30 years keeps your monthly payment low. For instance, on a $300,000, 30-year FRM at 4% APR, your monthly payment would be $1,506. On a 15-year FRM like the one above (3.5% APR), because you’re paying the loan off so much faster, your monthly payment is $2,100, nearly $600 more. That’s a new flat screen – every month.
Who It’s Best For: If you want to keep your monthly payments relatively low and need the security of knowing they won’t change, shopping lenders for free at LendingTree.com can help you find the best 30-year FRMs.