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Could a Shorter Term Fixed Rate Mortgage Save You Thousands in the Long Term?

Shorter fixed rate mortgages may not be for everyone, but according to a recent report by CBS MoneyWatch, the lesser known 20 year fixed rate mortgage could be a welcomed alternative to the popular 30 year fixed mortgage. Despite the higher interest rate it incurs, many of the benefits may make a shorter fixed rate mortgage worth it.

The report from CBS states that the most prominent advantage of choosing a shorter-term mortgage is the amount of money saved on interest paid over a shorter loan term. In their example, the amount paid toward interest over the term of the loan was almost equal to the principle amount.

Additionally, according to Informa Research Services, while the national average annual percentage rate (APR) on 30 year fixed rate mortgages has been hovering around 4.75%, the national average APR on 15 year fixed rate mortgages fell below 4.25% this week (Source: Informa Research Services' Interest Rate Review.).

Lastly, the most obvious benefit of choosing a 15 or 20 year fixed rate mortgage would be that the loan is paid off earlier. This can mean a couple different things for homebuyers. As CBS noted, for young homebuyers, this can mean that their home will be paid off by the time their children go to college.

Moreover, paying off your home quickly means building equity faster as well. Your home equity can then be used to finance minor home improvements, a vehicle purchase, or even a college education. Like any other loan, home equity loans need to be paid back as well, so it should be used wisely. However, many times, home equity loans and lines of credit are offered at lower rates than other types of loans.

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