There are two main types of mortgages. A fixed rate mortgage has the same rate and payment the entire time. An adjustable rate mortgage (ARM) can change its rate, and therefore your payment, as rates change in the marketplace.
We strongly recommend a fixed rate mortgage, for two reasons:
- Peace of mind is very important with debt. With a fixed rate, your rate can’t go up and your payment stays the same the whole time. Enough said.
- Sometimes ARM rates are lower than fixed rates. In this case, some people are drawn to an ARM because the lower rate lets them afford a bigger house that may not be within their means, especially if the rate rises later. This is a mistake in our view.
The most common fixed rate mortgages are the 30 year and 15 year. The 30 year has a higher rate but a lower monthly payment. As of this writing, the 30 year fixed rate is 5.00% and the 15 year fixed is 4.125%. Rates rose in Q1 2022, but they’re still low by historical standards.
Example
Buy a $500K home with 20% down. This means you put $100K down and borrow $400K.
- 30 year monthly principal & interest at 5.00% = $2,147.
- 15 year monthly principal & interest at 4.125% = $2,984.
- Your total monthly payment will be higher if you escrow for property tax and homeowner’s insurance.
With the 15 year, you get done sooner, but pay more each month. Many people love the lower rate of the 15 year, but they’re concerned about the higher payment. If you’re in doubt at all, go with the 30 year. You can always pay more than the minimum each month, and fall back to the minimum if needed. As we like to say, peace of mind is very important with debt.
