Decide what type of mortgage you want
We’re not going to advocate for adjustable-rate mortgages, simply because they are riskier and not the best decision for those getting started in the homeownership game.
Instead, we will focus on the two most common fixed-rate mortgages: 15-year and 30-year mortgages.
The first thing you should note is that going for a 15-year loan means you’ll be able to pay off your house 15 years sooner than if you get a 30-year mortgage. This, of course, means that you’ll have higher monthly payments on the 15-year loan.
But since 15-year mortgages have lower interest rates, the amount you will pay over the life of the loan will be considerably less. Let’s look at an example using average mortgage rates on 10/19/14:
Sale price of house: $175,000
- 30-year fixed mortgage Rate: 3.93%
- 15-year fixed mortgage rate: 3.04%
- 30-year monthly payment: $828.43*
- 15-year monthly payment: $1,211.89*
- 30-year life of loan payment total: $298,234.80
- 15-year life of loan payment total: $218,140.20
As you can see, although the monthly payment for a 15-year mortgage is higher, you will end up paying considerably less over the life of the loan than you would with a 30-year mortgage. If you can afford the extra monthly amount, a 15-year mortgage is a much better deal.