Understanding a FRM is easy: it is a fixed rate mortgage with as little as ten or as much as forty year’s maturity. Obviously, the longer term loan have lower monthly payments, but you will be paying for a long time. The ideal for most homeowners is to find the FRM that combines affordable monthly payments with the shortest term possible.
But it is important to make sure that you can afford the higher monthly payments on a longer term FRM. A short term FRM obviously has a higher monthly payment than a longer term one; for example, a 10 year FRM can have monthly payments that are twice as high as a 40 year FRM.
Another concern is that, since the lender has a longer period of risk, it will charge a higher rate for the longer term loan.
Fifteen and thirty year fixed rate home loans are the most popular, and for reasons cited above, the rates on fifteen year mortgages are usually lower than for the longer mortgages. Of course, the long term FRMs will have low payment with higher interest rates.
This is the reason a lot of homeowners choose the 15 FRM.
A mortgage consultant can calculate the mortgage payment you will have on a fifteen year mortgage. If you can’t afford this mortgage payment, you can then move into a longer term until you meet the number you have budgeted for your home loan.
Don’t forget that you can always pay your home loan down sooner in different ways. This is often a solution to a homebuyer who can only afford “x” today, but as his income increases, can afford to pay a higher monthly payment. If you make additional payments on the loan, you are effectively lowering the maturity.
A quick call to a mortgage broker, or a perusal of the internet will allow a potential borrower to calculate the payments required on each term of a mortgage at given rates. The internet is an excellent source, but many people find it simpler to just work with a broker to do these calculations.
The process, therefore, is to find the shortest term mortgage for which you can afford the mortgage payments, while obtaining the best rate, recognizing that the longer the term of the loan, the lower the payments, but the shorter the term of the loan, the lower the interest rate.
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