Choosing Between a 15-Year and 30-Year Fixed Rate Loan

If you are buying a house in Birmingham or the surrounding area, then you will need to decide whether to opt for a 15-year or 30-year mortgage.

At ARC Realty, we want to make sure you are thoroughly informed about your options so that you can make the right decision for you and your family.

We have crunched the numbers using an example home priced at $150,000, with a 20% down payment. Using this example, we will explain the differences between a 15-year and 30-year fixed rate loan so that you can determine which to choose for your specific situation.

If you have any questions, we are happy to help! Our experienced, professional real estate agents are here to help with your home buying or selling needs.

What Will Your Rate Be?

There are two different rates to consider when choosing a loan. The interest rate, which in this case is fixed, and the annual percentage rate (APR), which consists of any additional fees associated with borrowing.

Using our $150,000 home as an example, let’s assume your interest rate on a 15-year loan will be 3.125% and your APR will be 3.208%. If you were to choose the 30-year fixed rate loan your interest rate rises to 4% with an APR of 4.048%.

A 15-year fixed rate loan provides you with a better interest rate and APR, but there are other considerations when choosing which type of loan is best for your specific needs. One of the biggest deciding factors is often your monthly payment.

What Will Your Monthly Payment Be?

A 15-year loan may have the lower interest rate and APR, but the 30-year loan comes with much lower monthly payments. Many people opt for a 30-year loan because the payments are often too high for their budget with a 15-year loan.

Take our example home of $150,000, for instance. With a 30-year fixed rate loan, your monthly payment would be $716. If you switch to a 15-year fixed rate loan, that payment jumps up to $1,045. That $329 per month difference may mean the difference in a home you can afford and a home that is out of your budget.

What is the Overall Cost?

With a 15-year loan, you have a lower interest rate and APR but a higher monthly payment. With a 30-year loan, you have a higher interest rate and APR but a lower monthly payment. How does this come out in the long run?

For our $150,000 home with a 20% down payment, you will end up paying a total of $188,100 for your home with a 15-year fixed rate loan. With a 30-year fixed rate loan, that total becomes $257,760. By choosing a 15-year loan over a 30-year loan you will save $69,660 in interest!

Obviously, you will save more money to go with a shorter duration loan. However, that doesn’t necessarily mean that a 15-year loan is the right choice for you and your family. Most people want the lower monthly mortgage payments and therefore opt for the 30-year loan. However, if you can swing the higher payments and plan on staying in the new home for the foreseeable future, then a 15-year loan is a great way to save a significant amount of money in interest.

Buying a Home in Birmingham? Let ARC Realty Help!

If you are buying a home in Birmingham and want to work with an experienced real estate agent who is familiar with the Birmingham market, then turn to ARC Realty.

Contact ARC Realty today and get in touch with our amazing agents who can answer all of your questions and help you navigate the home buying process successfully!