Conventional Mortgages

Mortgages, loans that purchase real estate and use it as collateral for the arrangements, come in many different forms. However, a couple types of mortgages are by far the most well known and most commonly used by people who need financing to buy a home--conventional mortgages and adjustable rate mortgages.

Conventional mortgages are loans between borrowers and lenders that aren't insured by the government. The loan term for conventional mortgages is usually 30 or 15 years, and the interest rate is fixed. That means that unless you take action and refinance, your interest rate will be the same for the life of your mortgage. Payments for this type of mortgage are made monthly until the mortgage is paid off. The monthly payments consist of principal and interest, and also may include a portion for real estate taxes and homeowner's insurance that goes into an escrow account until needed as well.

The 30- or 15-year fixed rate mortgage is far and away what most people will end up with when they buy a home. A fixed rate mortgage has its advantages and disadvantages. If you are purchasing a home when interest rates are low, a fixed rate mortgage is a real advantage because you've locked in a low rate and don't have to worry about rising interest rates for home loans. Your payments are the same every month, and that helps make budgeting and financial planning easier. A fixed rate mortgage is an especially good way to go if you are staying in the home you are buying for the long run, because that gives you a chance to build up equity in the house over the years.

The downside of fixed rate mortgages. Which brings us to the downside of fixed rate mortgages, particularly 30-year fixed rate mortgages. If you don't plan on staying in the home you're buying for at least a few years, you will only be making interest payments rather than building up equity in your home. If you know that it is likely that you will stay in your home for less than a few years, you would be better off with a 15-year fixed rate mortgage, or perhaps a different type of less conventional mortgage. At least with a 15-year fixed rate mortgage, you will be building up equity faster in your home and paying much less in interest in the long run.

As a matter of fact, if you are using a fixed rate mortgage to finance the purchase of your home, you should opt for a 15-year over a 30-year term if you can afford the larger monthly payments. The benefits to you will be threefold. You will build up equity in your home quicker, you'll pay less interest in the long run and you won't have a mortgage payment after 15 years which will leave you with that much more money monthly to spend and invest as you see fit to achieve your life's goals.

Tip Are you still a bit intimidated by taking on a 15-year rather than a 30-year mortgage, but would love to knock off that mortgage in 15 years, not to mention saving all that interest? In that case, you might want to think about the following course of action: Use a 30-year mortgage to finance the purchase of your home and make payments that correspond with 15-year financing. You can do this by doubling the monthly mortgage payment you make and specifying that the extra payments go toward your loan principal.

Making these early payments can result in substantial savings.

Financial Calculators How much interest can you save by increasing your mortgage payment? Use this Mortgage Payoff Calculator to help you find out. Click the "View Report" button to see a complete amortization payment schedule, and how much you can save on your mortgage!

Some lenders will set up payment arrangements for 30-year mortgage holders where you make bi-weekly mortgage payments, usually through automatic withdrawals from your bank account. We suggest you avoid these plans unless you really need the discipline of the forced payment. Lenders often charge hefty fees of hundreds of dollars to set up these bi-weekly mortgages, and you can do the same thing on your own without paying for it by making two payments a month on your mortgage toward your loan principal. Also, doing this on your own doesn't lock you into a payment schedule you can't meet if your financial circumstances change or you have a rough couple of months.

Financial Calculators Bi-weekly payments accelerate your mortgage payoff by paying 1/2 of your normal monthly payment every two weeks. By the end of each year, you will have paid the equivalent of 13 monthly payments instead of 12. Use this Bi-Weekly Mortgage Calculator to show you possible savings by using an accelerated bi-weekly mortgage payment. This simple technique can shave years off your mortgage and save you thousands of dollars in interest. Click on the "View Report" button to see your savings!

Prepayment penalties. This brings us to another point that we cannot stress strongly enough. You must make sure that your mortgage does not have a prepayment penalty clause. What happens if your mortgage has this type of clause? If you pay off your mortgage before the end of the loan term, you will be charged a penalty. Remember, this is important even if you originally have no intention of paying off your mortgage early. You never know what can transpire over the long length of conventional mortgage terms. And you never want to be in the situation where you save money in mortgage interest by paying off your mortgage ahead of schedule only to be penalized for doing so. Note that some states prohibit prepayment penalties altogether.

Your monthly payment. If you are one of the many who is buying a home using a fixed rate mortgage, you can use the mortgage calculator below to figure out what your monthly payment will be for a 30- or 15-year fixed rate mortgage or use the tables below as a general guideline.

Financial Calculators Determining which mortgage term is right for you can be a challenge. With a 15-year mortgage you will pay significantly less interest, but only if you can afford the higher monthly payment. Use this Mortgage Comparison Calculator to help you compare these two mortgage terms and decide which term is better for you.

Obviously interest rates play a huge role in the size of your monthly mortgage payment. Multiply the difference in amounts at various interest rates by 360 months for 30-year mortgages or by 180 months for 15-year mortgages, and you can see how even a 1 percent difference in the interest rate really adds up. That's why it's important that you obtain a mortgage with a lender who will give you the best rate possible.

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