If you already have a home mortgage, this is an ideal time to refinance, with interest rates near record lows. If you’re not a homeowner, lower mortgage rates make buying a home more affordable. Should you take out a 30- or a 15-year mortgage? Each type has pros and cons.
30-year fixed-rate mortgages. These mortgages give you security because you know what your payments will be over the truly long-term but they also have the highest interest rates. With a 30-year mortgage your payments are relatively low.
15-year fixed-rate mortgages. These mortgages are paid off in half the time of a 30-year loan so each monthly payment will be higher. For example, going from a 30-year, $100,000 mortgage to a 15-year term might raise your monthly payment by about $200. However, you’ll avoid 15 years of interest payments and you likely will get a slight break on rates, saving you thousands of dollars in total outlays.
Yet another alternative is an adjustable-rate mortgage (ARM). On a “5/1 ARM,” for example, the initial rate changes after five years, then is adjusted annually. Going from a 30-year loan to a 5/1 ARM might cut your rate by around 0.5 percent, so this is a good choice if you don’t expect to be in the home longer than five years.