real estate

The Pros and Cons of Fixed-Rate Loans

Consider these pluses and minuses before jumping into a loan you'll be paying for the next 15 to 30 years.

If you're considering buying a home, you'll also need to take into consideration the type of mortgage loan that will work best for you and your finances. Here are three common loan types including the pros and cons for each:

Long-Term Mortgages

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. 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.

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.

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.

Most Popular

Why Are Gas Prices Still Going Up?
spending

Why Are Gas Prices Still Going Up?

The cost of a gallon of gas is at an all-time high. What’s driving the surge and will gas prices go down anytime soon?
May 23, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Which States' Taxes Are Going Down
Tax Breaks

Which States' Taxes Are Going Down

State lawmakers are cutting income, sales and property taxes to return budget surpluses to residents.
May 25, 2022

Recommended

Cash Home Buyers: New Services Offer Help Making All-Cash Offer
Becoming a Homeowner

Cash Home Buyers: New Services Offer Help Making All-Cash Offer

Some firms help home buyers make all-cash offers on homes. Weigh the fees before you sign on.
May 25, 2022
12 Cheapest Small Towns in America 2022
real estate

12 Cheapest Small Towns in America 2022

Affordable small towns might not be for everyone, but their charms put them among the best places to live for plenty of folks.
May 25, 2022
The 25 Cheapest U.S. Cities to Live In
places to live

The 25 Cheapest U.S. Cities to Live In

Take a look at our list of American cities with the lowest costs of living. Is one of the cheapest cities in the U.S. right for you?
April 28, 2022
The 2022 Real Estate Market with Daniel Bortz
Becoming a Homeowner

The 2022 Real Estate Market with Daniel Bortz

Daniel Bortz doesn’t just write about home sales and housing prices – he’s been in the business. He’ll share insights about the real estate outlook fo…
March 23, 2022