The traditional 30-year fixed-rate mortgage is among the most affordable loan products available today. The longer term allows for a lower monthly payment than that found with a 15-year or 20-year mortgage. The fixed rate makes it more stable than an adjustable rate product; the monthly payment on the loan will never go up. In addition, few 30-year fixed-rate mortgages come with pre-payment penalties. This makes them flexible; you can pay off your mortgage earlier of you want.
That said, a 30-year fixed-rate mortgage is not always the best choice for every homeowner. There are a number of alternatives that could be a better fit for your financial goals.
Cash – While the many of home buyers may have been unlikely to consider an all cash offer in the past — that trend is changing. In 2014, 43% of all home purchases were cash offers, according to Realtytrac data. That’s nearly half — and if you can afford to go the all-cash route, there are a few benefits. First, you’ll avoid the hassle of applying for a home loan. Second, now that the real estate market is again on an upswing, you may earn a better rate of return on your investment than you will if you leave the cash in CDs or other low-interest savings vehicles. Finally, a home seller may be more likely to give you a discount on the purchase price in exchange for the ease of a closing facilitated by cash.
Fifteen-year fixed-rate mortgage – If you have the means to make the larger monthly payments required by a 15-year fixed-rate loan and want to be mortgage-free sooner, this is an attractive alternative to the traditional 30-year product. It and the 20 year fixed rate mortgage are increasingly becoming a preferred loan option for refinancing. Because you’re paying a larger portion of the principal each month, you’ll build equity in the property at a much faster rate. This product often has a lower interest rate than a traditional 30-year loan as well—which can save you thousands of dollars over the life of the mortgage.
Five/one adjustable-rate mortgage – Adjustable rate mortgages (or ARMs) got a bad rap during the mortgage crisis. However, a 5/1 ARM is still a viable loan option for homebuyers and refinancers who are comfortable with some degree of risk and don’t plan to live in their properties for long. The product offers a low fixed interest rate for the first five years followed by annual adjustments for the remaining loan term. The lender will calculate the rate adjustment based on a variable rate plus a fixed margin. Most of today’s 5/1 ARM loans include limits on how much the rate can adjust in a single period and the maximum rate possible over the life of the loan.
Mortgage interest rates are still quite low, making it a great time to buy or refinance for many Americans. If you’ve been dreaming of lowering your mortgage payment, reducing your loan term, or buying a new home, contact your mortgage professional to discuss your borrowing options including these 30-year fixed-rate mortgage alternatives.
