Mortgage Terms – Different Maturities

There are a variety of different loan products available in today’s mortgage marketplace.  All of these loan products will have a monthly mortgage payment that is dependent on the term of the loan.  The term of the mortgage loan is synonymous with the maturity of the loan or the length of time it until the loan is paid in full on fully amortizing mortgage loans.  A fixed rate, fully amortizing loan is one in which there are equal monthly mortgage payments that includes the principal and interest that pays the loan off in full with the final scheduled payment.  Balloon loans and negative amortization loans do not meet this requirement and may not be paid in full with equal installments at the end of the term.  Since almost all adjustable rate mortgages are for 30 years, the term comparison is of a little value for these loan types. 

For mortgage loans that are fixed rate, fully amortizing, there are five different term options for these standard home loans.  This is a quick review of the various mortgage term options and data as to the benefits and tradeoffs of each mortgage loan type.  Using this information with the mortgage calculators, especially the term comparison mortgage calculator may help a borrower narrow down the choices to which loan type is best.

On a fixed rate mortgage, the interest rate remains the same through the entire term of the loan.  Different fixed rate mortgage loans are distinguished by the interest rate and the term.  The interest rate is set by the rate offered between different lenders, the amount of points paid and current mortgage rates available.  The determination as to what interest is best can be established by using the mortgage calculators and shopping for the best rate armed with the relevant data to comparison shop provided by using the mortgage calculators.  The term selection is matter of preference and potentially the ability to qualify for a specific mortgage loan term.  There are five popular mortgage loan terms: 10 year fixed rate, 15 year fixed rate, 20 year fixed rate, 30 year fixed rate, and 40 year fixed rate mortgage loan.

10 Year Fixed Rate Mortgage

A 10 year fixed mortgage has an interest rate that does not change throughout the 10 year loan period.  The 10 year fixed rate mortgage is generally the shortest term available on a fully amortizing loan.  This short term loan allows for a very quick payoff of the home mortgage.  The tradeoff for obtaining a loan that pays off the mortgage this quickly is higher monthly mortgage payments.  Since the monthly mortgage payments are calculated on the principal balance for a short period of time the monthly payments are naturally larger than they would be on loan terms in excess of the 10 year term.  For those who can afford this level of monthly mortgage payments, it can be a clever choice since hundreds of thousands of dollars can be saved in interest over the life of the loan compared to the longer term mortgage products. 

15 Year Fixed Rate Mortgage

A 15 year fixed rate mortgage permits a homeowner the opportunity to own their home outright in a 15 year period.  The monthly mortgage payments are a little lower than a 10 year mortgage due to the longer term.  A homebuyer who accepts this home loan will pay less than half of the total interest of the more common 30 year mortgage.  The interest rate on the 15 year mortgage is generally slightly lower than a 30 year fixed rate mortgage adding to the total savings. 

20 Year Fixed Rate Mortgage

The 20 year mortgage term helps a borrower get a mortgage where the interest rate is manageable, and the term still allows for rapid equity build up.  Similar to the 10 and 15 year term mortgages, these are relatively short term loans.  The shorter the term of the mortgage loan the more rapid the reduction of the balance of the mortgage.  Typically there is no rate advantage in shortening the term from 30 to 20 years.  The rate on the 20 year term mortgage loan is usually the same as that on the 30 and slightly higher than a 15 year mortgage.  The 20 year term is for borrowers who want to pay off the mortgage as soon as possible but are not comfortable or qualify for the payment on the 15 year mortgage loan.

30 Year Fixed Rate Mortgage

The most common home loan is the 30 year fixed rate mortgage.  This is the most common loan program for those buying homes for the first time and even for most refinance transactions.  The 30 year fixed home loan fits more financial situations than any other home loan.  This loan program also allows the homebuyer to have low monthly payments without paying excessive amounts of interest over the life of the loan.  The longer term will lower the monthly mortgage payment but does lead to a slower build up of equity in the home.

40 Year Fixed Rate Mortgage

40 year mortgages are generally the longest term available.  This is not a very common home loan and many mortgage lenders may not even offer this product.  40 year mortgage rates are usually slightly higher than the traditional 30 year fixed rate mortgage.  Borrowers who may not have normally qualified for a home mortgage may utilize this loan product as it offers some of the lowest monthly mortgage payments that may afford an easier loan approval.  This loan is a good alternative for borrowers who do not want to have an adjustable rate mortgage but still want or need the low monthly payment that comes with the long term loan.  The clear disadvantage that goes along with this loan is that the term is long and of all the mortgage loan options it has the slowest level of principal reduction.

Overall, the reduction in payment from lengthening the term becomes less and less effective as the loan term gets longer.  Lower monthly mortgage payments are clearer easier to manage and may allow for easier loan qualification. Selecting a term on a fixed rate mortgage must take into the varying mortgage rates between the different terms.  Longer term loans, in general, have higher interest rates than shorter term loans.  Often the rate difference is rather small and may not even exist between home loans with the smallest term differences.  Mortgage calculators that compare mortgage terms are easy to use tools that will assess the difference between these loan products.  The term comparison mortgage calculators can also be employed to enter different interest rates and therefore they can evaluate the changes this attribute will have on the different loan products.  When entering the relevant data in these mortgage calculators as well as the mortgage payment calculator, it is important to draw on current mortgage rates that apply to the specific loan term in order to achieve precise evaluations.

This entry was posted on Thursday, December 18th, 2008 at 10:14 am and is filed under Mortgage Basics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.