Most lenders offer several types of mortgages; the most common are the fixed-rate mortgages for 30 years or 15 years.
30-Year Fixed Rate
This mortgage is an industry standard, as total payments are spread over so many years that your monthly payments are lower than they would be on a shorter term loan. The interest rate, which is set, or locked in, at the time of obtaining the mortgage, remains the same throughout the life of the loan.
On a 30-year loan, you end up paying thousands of dollars more in interest compared with a shorter-term obligation, but this interest is 100-percent tax deductible, which reduces your after-tax cost.
15-Year Fixed Rate
This mortgage also is becoming a common loan because borrowers pay a lower interest rate in exchange for larger monthly payments. Note, however, that a smaller portion of your monthly payment goes for interest and therefore the tax deduction is smaller.
With a 15-year mortgage you could get an interest rate that is typically one-quarter to one-half percent lower than a 30-year mortgage. The shorter the term, generally the lower the interest. Yet, the main advantage is the fortune in interest you will be saving during the life of the loan.
Example
Let's say you have a $100,000 mortgage. Let's compare how much money you would pay out in interest over 30 years vs.15 years. The following chart shows the numbers. The monthly loan payments are principal and interest only. As you can see, with a 15-year loan, you would save $94,726 in interest.
| Loan term | Rate | Mthly. payment | Total interest |
| 30 years | 8.00% | $699 | $164,155 |
| 15 years | 7.75% | $941 | $69,429 |
| Interest savings: $94,726 | |||
Take the example above: With the 15-year loan, the monthly mortgage payment is $242 more than the 30-year mortgage. You may want to put that money toward another investment. For instance, in a bull-market economy, you can make more money investing that $242 monthly in mutual funds or other investment securities.
Keep in mind that there are ways to prepay your mortgage and whittle away at the principal each month, so that the loan is paid off sooner than 30 years.
Also, it depends on how long you plan to own the home you are purchasing. If it's less than five years, you might consider an adjustable-rate mortgage, or ARM.
If you are unsure of which loan type to choose, check our online loan comparison chart.
