These mortgages take the uncertainty out of the loan payment process. They feature a fixed interest rate for the life of the loan, so monthly payments (interest and principal) will always be the same. Fixed rate mortgages are self-liquidating, meaning the loan is designed to pay off the principal by the time of the last payment.

The typical 30-year loan at 5% interest would require a repayment of $1.93 per dollar borrowed. A 15-year loan at the same rate would require a repayment of $1.42 per dollar borrowed. This interest rate reduction occurs because the lender has less risk with their money outstanding for half the number of years. However, the shorter loan requires a payment 48% higher than the longer loan, as the principal repayment period is condensed. The higher the monthly payment, the lower the loan amount for which one qualifies.

Fixed rate mortgages are usually your best choice when interest rates are low and you plan to stay in your home for at least five years. This loan is designed for customers who see home ownership as a significant part of their wealth-building plan. In a way, it is a form of forced savings; as the months and years go by, the principal balance of the loan declines almost without notice.

However, if you expect to occupy more than one home before settling in a final location, this loan may not be beneficial, as it soaks up payment dollars that may be better utilized to obtain a higher loan amount or to invest in other ways.

Case Study
A customer came to EMA after another broker quoted a rate on a 30-year mortgage for his riverfront vacation home. He and his family enjoyed spending time at the river and planned to retire there. The customer, an executive with a large company headquartered in Richmond, had an investment strategy and felt secure in his life in Richmond. If his company decided to move him before retirement, he believed he could get a job with another company in the area.

Because of his expected time of retirement, his certainty of staying in the area, and the interest earnings on his investments, EMA recommended a 15-year (instead of a 30-year) fixed rate mortgage. The interest rate on the 30-year loan would have been above his investment portfolio yield, and the length of the loan burdensome going into retirement. Once retired, it is a concern to have half the life of the loan left, especially when the tax benefits of the interest payment are less useful in a post-employment world. Although the 15-year term requires larger payments, it is manageable because of the executive’s employment until the time of retirement.

The lower payments associated with the 30-year fixed mortgage was certainly appealing, but the burden of having a substantial balance due during retirement more than offset any current cash flow advantage.