A plug for short(er)-terms, fixed rates

On my drive into work today, I learned that fixed mortgage rates are going down due to the Freddie Mac/Fannie Mae takeover. The NPR interviewee also caught my attention when he said that the US was the only country in the world that offers a 30-year fixed loan product.

Apparently, long-term, fixed rate mortgages are unpopular outside the United States. While I am definitely not qualified to analyze any country’s lending system (the rest of the world has certainly had their fair share of housing woes), I would like to put in a good word for short(er)-term loans.

While most fixed rate mortgages in the US are for 30 years, qualified homebuyers do have the option of selecting a shorter-term, fixed rate mortgage. Generally, the shorter the term of your mortgage, the less interest you will pay over the life of the loan. While the monthly payment may be higher on a shorter loan, it could be offset by the reduced interest rates. In addition, you’ll build equity much more quickly (typically, around 50% of the principal balance is paid off in the first nine years).

There are pros and cons to everything, but if it is a financial possibility, a shorter-term, fixed rate loan may be worth considering. Use Bankrate’s mortgage calculators to compare loan products.

If the numbers don’t add up, instead of going to the edge of affordability, consider limiting yourself to a more comfortable debt-to-income ratio. When determining how much debt you can afford, remember that your mortgage payment, car payments plus your ongoing debt (credit card payments, student loans, child support, and so forth) should be no more than 41 percent of your gross income. For example: gross monthly income of $4,000 multiplied by 41 percent equals $1,640.

Kim McGrigg is the former Manager of Community and Media Relations for MMI.

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