The Pros and Cons of Fixed-Rate LoansKiplinger.com
The most common mortgage is the 30-year fixed-rate loan.
Pros. Predictability is the big plus. You know exactly how much interest you will pay over the term of the loan. Total monthly payment of principal and interest is fixed, and in early years it consists primarily of tax-deductible interest.
Mortgages without prepayment penalties permit you to shorten the term of the loan at will -- and lower ultimate interest cost -- by making periodic payments against principal.
Cons. Stability comes at a price. Interest rates on fixed-rate loans are usually higher than starting rates on adjustable-rate loans. If you choose a low-down-payment loan, you may have to pay for mortgage insurance -- an added monthly expense that protects the lender from risk of loss.
[Top]15-year, fixed-rate, fixed-payment mortgage
Pros. Principal balance is reduced relatively rapidly compared to longer-term loans. The 15-year fixed-rate loan permits you to own your home debt-free in half the time, and for less than half the total interest cost, of a 30-year fixed-rate loan. It offers some individuals a useful financial planning tool. Interest rates may be lower than those offered on 30-year fixed-rate loans.
Cons. Higher monthly payments make these loans more difficult to qualify for than longer-term mortgages. A 15-year mortgage reduces the number of homes you can afford to buy and locks you into making monthly payments roughly 15% to 30% higher than you'd make with a comparable 30-year loan.
[Top]Biweekly fixed-rate mortgage
Pros. The biweekly payment schedule of this kind of loan speeds up amortization, reduces total interest costs and shortens the loan term -- usually from 30 years to between 18 and 22 years. You make 26 biweekly payments -- which amounts to 13 annual payments -- instead of 12 monthly payments. Conversion to a 30-year fixed-rate loan is usually permitted. Payments are deducted automatically from your savings or checking accounts.
Cons. Private companies and lenders usually charge for this service. Registration fees and biweekly debit charges can make this a costly way to shorten the life of a loan and lower interest expense. The same objectives can be accomplished more flexibly with a 30-year mortgage by making an extra payment or two each year or by applying an additional sum to principal repayment when you make a monthly payment. As with other kinds of rapid-payoff mortgages, you trade total interest-cost reductions for reduced tax-shelter benefits.
[Top]Community Home Buyer's Program (CHBP)
This low-down-payment, fixed-rate mortgage was designed by Fannie Mae to help creditworthy buyers who can't qualify for standard conventional mortgages. You can choose among a 30-year, 20-year and a 15-year loan. To qualify you must have income no more than 100% of your area's median household. Fannie Mae, however, waives income limits in high-cost areas.
Pros. CHBP loans require less income and less cash. You may be able to pay as much as 33% of gross monthly income toward total housing payments (mortgage payments, taxes, insurance, and condo fees, if applicable) and still qualify. (Most mortgage lenders limit you to 28% or 29%.)
Your down payment can be as low as 5%. Many community organizations and state and local agencies provide subsidized loans to low- and moderate-income families to help them buy a home.
You won't have to bring as much cash to closing. In most cases, buyers are required to put two months of mortgage payments in reserve at closing or settlement. This requirement is reduced or waived for CHBP borrowers.
Cons. You will have to pay a monthly mortgage insurance premium.