Which is better? It depends. Generally speaking, a 15 year fixed has a lower rate than the 30 year fixed. The drawback of course is that the borrower has half the time to pay it off and the payments are higher. If you experience a financial setback, a 15 year mortgage payment is going to be harder to maintain and bring threat of foreclosure closer to home. However, a 15 year will cost the borrower less in interest at the end of the loan. Is there a happy medium between the two?
Making The Best Choice
Yes. One alternative is to have a 30 year fixed mortgage and pay 13 payments per year. Paying just one extra month’s worth of mortgage payments per calendar year will cut the mortgage life by almost seven years. It effectively makes the mortgage a 22.5 year mortgage. The borrower will have the safety and payment of a 30 year fixed but pay the mortgage off in 22.5 years. In the event you experience an unexpected financial hardship, having a 30 year mortgage that has extra payments made may provide a little wiggle room when you need to get caught up on payments. Rather than worry about refinancing or foreclosure, your lender may be more willing to enter into a mortgage loan modification on the current loan.
How does one accomplish this? The easiest way is to set aside an extra 10% of one monthly payment per month. For example, if the principal and interest (PI) is $1,000 then set aside an extra $100 per month. When the borrower gets to October (assuming he started in January) he will have accrued $1,000 to make the extra payment. After October PI is paid, simply send in another payment specifying that this is an extra payment to be paid toward principal only. Then the borrower pays November and December as needed and begin again in January.