In the United States, mortgages with fixed rates are better right now (if you stay in your house) because interest rates are extremely low right now. If you take an ARM, you will lose if you stay in your house, because interest rates are bound to rise.
If you select a 30-year mortgage, you will pay more overall. But it turns out that you only need to beat a 2-3% annualized return (assuming you took out a fixed-rate loan at interest rates right now) with the extra money you save every month in order for a 30-year mortgage to beat a 15-year mortgage. Of course, that’s assuming you have the willpower to set aside that money every month and the time and effort required to invest it.
If you select a 30-year mortgage, you always have the option of paying extra each month. In fact, if you paid 45% extra each month, you would finish it off in 15 years, and it would in fact be equivalent to a 15-year mortgage, except costing only 8% more overall (or a mere 0.5% per year). The reason a 30-year mortgage costs more is not mainly due to the higher interest rate—it is because most of your initial payments go towards the interest, as opposed to the principal—the interest isn’t reduced at first, and it also has 15 more years to compound.
Consider getting a 30-year mortgage if you expect any sort of volatility in your financial situation, as the price for such convenience is quite cheap. Note that this only applies if you have either the willpower to pay the extra amount every month, or the energy to find a superior investment with the extra money you are saving. A 15-year mortgage would be better for someone with e.g., severe akrasia issues.
Look into purchasing as many points as you can on your mortgage if you plan on staying in your house for at least 11-14 years. Do some analysis to figure out the break-even point for your situation. Note that banks profit because most people overestimate how long they will stay in their house. The average in the US is 5-7 years.
Look at the amortization formula (or use the PMT function in Excel) and run the analysis yourself—it’s too important to not bother. Put in different amounts of down pay, different interest rates, different amounts of extra monthly payments, etc., so that you gain a feel of the relative effects of the different factors.
In the United States, mortgages with fixed rates are better right now (if you stay in your house) because interest rates are extremely low right now. If you take an ARM, you will lose if you stay in your house, because interest rates are bound to rise.
If you select a 30-year mortgage, you will pay more overall. But it turns out that you only need to beat a 2-3% annualized return (assuming you took out a fixed-rate loan at interest rates right now) with the extra money you save every month in order for a 30-year mortgage to beat a 15-year mortgage. Of course, that’s assuming you have the willpower to set aside that money every month and the time and effort required to invest it.
If you select a 30-year mortgage, you always have the option of paying extra each month. In fact, if you paid 45% extra each month, you would finish it off in 15 years, and it would in fact be equivalent to a 15-year mortgage, except costing only 8% more overall (or a mere 0.5% per year). The reason a 30-year mortgage costs more is not mainly due to the higher interest rate—it is because most of your initial payments go towards the interest, as opposed to the principal—the interest isn’t reduced at first, and it also has 15 more years to compound.
Consider getting a 30-year mortgage if you expect any sort of volatility in your financial situation, as the price for such convenience is quite cheap. Note that this only applies if you have either the willpower to pay the extra amount every month, or the energy to find a superior investment with the extra money you are saving. A 15-year mortgage would be better for someone with e.g., severe akrasia issues.
Look into purchasing as many points as you can on your mortgage if you plan on staying in your house for at least 11-14 years. Do some analysis to figure out the break-even point for your situation. Note that banks profit because most people overestimate how long they will stay in their house. The average in the US is 5-7 years.
Look at the amortization formula (or use the PMT function in Excel) and run the analysis yourself—it’s too important to not bother. Put in different amounts of down pay, different interest rates, different amounts of extra monthly payments, etc., so that you gain a feel of the relative effects of the different factors.
Finally, please call it a “house”, not a “home”.
Only if you can come up with another synonym for house because it’s inelegant to repeatedly used the word “house” in a single paragraph.
I’m inclined to agree with Fowler.