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Choosing the Right Term

Over the years, mortgage lenders have introduced a variety of loan programs, all that address a specific niche within the borrowing community. The most common of these programs are called conventional, conforming loans and are underwritten to standards published by Fannie Mae and Freddie Mac. Here in Alpharetta and surrounding communities, the current conforming loan limit for example is $453,100. In fact, these two loan programs account for nearly two-thirds of mortgages issued today. But you can’t hide from the fact that there are multiple loan programs from which to choose.

Sometimes though just the number of choices can be a bit overwhelming. Maybe it’s an FHA loan or perhaps you’re eligible for a VA loan. Once you settle in on the loan program you and your loan officer choose, you’ll then need to pick out which interest rate for that particular loan is better. Do you pay points and get a lower rate or choose to come to the table with as few closing costs as possible? Early on, borrowers soon see there are lots of decisions to be made. And one that many skip over is the actual term of the loan.

Let’s say you’ve settled in on a 30 year fixed rate loan, the most popular choice. This loan term stretched over 360 months will provide the lowest monthly payment for that program. But surely you’ve heard about the 15 year loan, right? That’s often the choice of terms borrowers make, a 30 or a 15 year term. A 15 year term has a lower rate and there is less interest paid over the life of the loan. Why wouldn’t everyone want to take a shorter loan term and pay off the mortgage in 15 rather than 30 years? Because the monthly payments on the shorter term are higher than the 30 year. So much so that even though someone might want the shorter term, the monthly payments squeeze the budget and they can’t qualify any longer. But there are still other choices.

If 30 years has too much interest for your taste but the 15 year has monthly payments that are a bit out of reach, there are also 20 and 25 year terms. With a 20 or 25 year term, there just might be the perfect match between low payments and less interest.

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