Today’s Mortgage Rates: Choosing Between a Short-Term and Long-Term Mortgage

by on Mortgage

Mortgage Word Cloud Written on a Chalkboard

In today’s real estate market, everyone from seasoned investors to first-time homebuyers is looking at the real estate market with a fresh perspective. With declining foreclosure activity and rising home price, the real estate market is definitely rebounding and the outlook over the next few years is promising. Even former foreclosure victims are taking advantage of the current real estate market, which is filled with amazing deals on foreclosures and short sales as well as other discounted properties.

However, what if you have found the perfect home and you are now trying to decide between a short-term or long-term mortgage. What are the pros and cons of each in the current real estate market?

Long-Term vs. Short-Term Mortgages in 2013

By far the most common type of home loan mortgage is a 30-year fixed mortgage. In the current real estate market, mortgage rates on a 30-year fixed mortgage are around 3.6%. On the other hand, mortgage rates on a 15-year fixed mortgage are approximately 2.75%. Did you know that choosing between these short-term and long-term mortgages can save or cost you thousands?

Let’s assume you are purchasing a property for $200,000 with zero money down (just for the sake of making calculations easy) with a 30-year fixed mortgage rate of 3.6%. By the end of the 30 years, you will have paid $200,000 in principal and $127,341.98 in interest for a grand total of $327,341.98.

In comparison, if you opt for the 15-year fixed mortgage rate with an interest rate of 2.75% you will pay $200,000 in principal payments and $44,303.44 in interest. In total your home would cost you $244,303.44.

That is a difference of $83,038.54 – a significant amount of money to save. Clearly the route to go – if you can and if you plan on staying in the house throughout the duration of the loan – is to choose a short-term mortgage with a lower interest rate and save tens of thousands of dollars over the years.

Is a Short-Term Mortgage Right for You?

However, not everyone has the luxury of opting for a short-term mortgage. Although these mortgages are cheaper in the long run, they are more expensive monthly. Utilizing the same numbers above, the monthly mortgage payment on the 30-year fixed mortgage at 3.6% would be $909.30. In comparison, the monthly mortgage payment on a $200,000 home with a 15-year fixed mortgage and a rate of 2.75% would be $1,357.25. That is a difference of $447.95 per month.

At the end of the day, there are pros and cons to both short-term and long-term mortgage – you have to decide which is best for you and your family. Will you choose a short-term or long-term mortgage for your next home purchase?