A fixed-rate mortgage carries the same interest rate throughout the life
of the loan. An adjustable-rate mortgage has an introductory fixed-rate
period, usually five, seven or 10 years. After that, the rate
periodically adjusts according to a benchmark set by the market. There
is usually a cap on how much the rate can adjust upward.
Fixed-rate mortgages offer more predictability, as your monthly
principal and interest payment won’t change, and make sense if you plan
to remain in your home for the foreseeable future. Adjustable rate loans
can be cheaper during the initial fixed-rate period, and may be the
better deal if you know you are likely to move before the rate begins
adjusting. But keep in mind that if you don’t move as expected, your
rate will follow the market and your monthly payment could rise
considerably.
15-Year vs. 30-Year Mortgage
The number of years refers to the term of the loan, or the amount of
time you have to pay it back. You have 30 years to repay a 30-year
mortgage, and 15 years to repay a 15-year mortgage.
The advantage of a longer loan term is lower monthly payments – by
spreading the loan amount over 30 years, you can pay more gradually. The
advantage of a shorter term is that, while your monthly payments will be
higher, the overall cost of the loan is less because you are paying
interest for a shorter amount of time. Interest rates for 15-year loans
also tend to be considerably lower than 30-year rates.
For more information on buying a home, check out the Consumer Financial
Protection Bureau’s detailed online guide,
Owning a Home.
