Mortgage Products: The 15 FRM

In order to understand the theory behind the fixed ratemortgage, you have to understand the mindset of the mortgage banker and themortgage borrower of thirty or forty years ago. The Great Depression left a tremendous impression on the minds of thiscountry, so much so, that one of the popular mortgage products of the turn ofthe century, the interest only loan, was shelved, never to be heard from again.Not until the recent explosion in real estate prices and the mortgage industriesefforts to accommodate home buyers of all types has there been such mortgagevariety.

The trendafter the depression, through post-war America, and really until the late 1990s was the fixed rate mortgage. That’s the type of mortgage the bank offered, and the public generallydidn’t consider anything else. Why didso many individuals, as well as banking institutions popularize the fixed ratemortgage? This loan type, more than anyother product available, was a security blanket for the banker, and thehomeowner. 

The banker,offering the mortgage loan, was assured of a 20% down payment and a securemonthly payment with a fixed interest rate that would benefit the bank. The homeowner received a set monthly paymentamount that was affordable, and a fixed number of years to repay the loan,usually 15, 20, or 30.

Thisarticle will discuss the 15 year fixed rate mortgage, and the advantagesoffered by the 15 versus the 20 versus the 30 year option. We have really already established the “why”when it comes to the fixed rate mortgage option in general, but we need to lookat now, the term of the fixed rate mortgage. “Why” would you choose the 15, or the 20, or the 30? Well it really depends on two factors: whereyou are in your life, and what you can afford.

If youhappen to be in your 20s, with a lifetime to pay for your home, but not a lotof income, and two children to raise the 30 year option would get you thehouse, with as low a monthly payment as possible. Granted, you will pay more in interest, butyou won’t have to pay out quite as much each month. If money is tight, a lower payment can meanthe difference between buying a home and renting a home.

If you’rein your mid-to-late thirties, still quite a long way from retirement, the kidsare almost grown, and your monthly income is substantially greater than it was10 years ago, the 15 or 20 year mortgage would suit your needs. Most often, the homeowner will choose the 20year option, and make principal payments when affordable.

But let’ssay you’re in your late 40s and the amount of time until retirement is growingever short; you have your children raised, and your monthly income is nice tolook upon. What option would you take? For most, it is the opportunity to pay forthe home as quickly as possible, thus the 15 year fixed rate mortgage is themortgage of choice.

Manyhomeowners who purchase a home in their mid-to-late forties are purchasingtheir second home; some even have a substantial amount of equity, or downpayment for the home. If this is thecase, the 15 year fixed rate mortgage, works to an even greater advantage, inthat the homeowner has substantial equity, a lowered monthly payment, and apreset monthly payment amount. Theinterest is tax deductible, and they are now secure in the knowledge that theirhome will be fully paid out prior to retirement.

When tryingto decide which mortgage is the mortgage for your situation, you need to have amortgage broker or banker that has an excellent understanding of your financialstatus, your goals and objectives for your mortgage purchase, and your abilityto absorb unexpected expenses or change. All of these factors affect your ability to repay a loan, the choice youwill make on a loan, and the satisfaction you will have during the servicing ofyour mortgage loan. 

Forthese reasons, and others, the fixed rate mortgage, especially the 15 yearfixed rate mortgage is often the mortgage product of choice, especially for thebaby boomers, and the forty-something homeowners today.