How to Decide Between Mortgage Types
Cash flow, life plans and time horizon play a factor in choosing a mortgage.
With the dizzying array of mortgage types available, many borrowers have difficulty deciding what type of mortgage is right for them. When deciding between a 30-year and 15-year fixed rate mortgage, or an adjustable rate mortgage, there are several key points you should consider.
Many Hawaii homeowners opt for 30-year fixed-rate mortgages, or FRMs, because of the high cost of housing. A 30-year FRM generally results in lower monthly payments, which in turn allows homebuyers to purchase more desirable homes, such as those with more square footage or in specific neighborhoods. However, you should be aware that opting for a 30-year over a 15-year term will result in higher interest costs over the life of the mortgage.
A 15-year FRM offers a lower interest rate compared to a 30-year FRM, but results in a higher monthly payment. A shorter loan term allows borrowers to pay down the principal faster and save on interest payments they would accrue through a 30-year mortgage plan. While saving money is generally a best practice, a 15-year mortgage with high monthly payments can strain your ability to set aside money for other life goals, such as retirement, college tuition or investments. Assessing your 15-year objectives will help determine whether this shorter-term payment option aligns with your financial plan.
In addition to mortgages with a fixed rate over the term of the loan, lenders also offer adjustable-rate mortgages, or ARMs, that feature lower fixed rates for specified periods of time before they adjust to variable rates that typically change annually. Borrowers who seek out ARMs are usually property “flippers” (people who buy homes and resell them quickly for profit) or those who plan to refinance before the end of the introductory period. ARMs are also popular with temporary residents who have come to Hawaii to fulfill work commitments, such as government contractors or military personnel. Because of the way ARMs are structured, they are often better suited to those who plan to live in their homes only in the short-term.