How to Choose a Home Loan Program Wisely - Which Loan Program Will Save You the Most on Interest?

When you want to buy a house, the first thing that comes to mind is a cozy house where you can live comfortably. However, if the house you want to buy does not match your financial situation, it is just a dream. Therefore, before purchasing a house, many people ask about ways to reduce interest by getting a short loan repayment period and low interest rates from the bank.

There are practical home loan programs that can help you save money on your mortgage and make your new home a home sooner. Here are four of the most popular ones:

There are 30-year fixed, 15-year fixed, adjustable rate mortgage (ARM), and balloon mortgages . Let's take a look at each of these four.

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30 year fixed rate loan

This is the most widely used program. The 30-year fixed term is a fixed amount paid in installments over a long period of 30 years, so the monthly payment amount is low. However, since the principal is repaid over a long period of 30 years, a lot of interest is paid.

For example, let's say you borrow $400,000 to buy a house at an interest rate of 4%.

In this case, the monthly payment amount is $1,909 (cents omitted), and the amount paid in interest over a 30-year period is $687,240. However, if you purchase it at a 3.5% interest rate for a 15-year term, the monthly payment will be $950 more, $2,859. This amount is a bit high for working people, so many prefer a 30-year fixed.

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15 year fixed rate loan

If you purchase a 15-year fixed term, you have the advantage of owning your own home in 15 years or even sooner. The interest rates are usually low, so you also save on interest.

For example, if the interest rate is 4% for a 30-year fixed term, the interest rate for a 15-year fixed term is usually 3.5%, which is about 0.5% lower. This saves a lot of money on interest. For example, if you want to repay $400,000 with a 15-year fixed term at a 3.5% interest rate, the total amount paid in interest will be $114,620 (monthly payment of $2,859). This is a whopping $172,620 in interest savings compared to when calculating at 4% for a 30-year term. This is why the number of homebuyers choosing a 15-year fixed term has been increasing.

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Adjustable Rate Mortgage (ARM) Interest Rate Program

The advantage is that the monthly payments are lower than other loan programs for the first few years. The interest rate changes are usually on a three-month, six-month, or yearly basis, rather than monthly.

However, there is a disadvantage that the monthly payment amount generally increases as the years go by. When choosing this loan program, it is recommended to carefully review the contract terms. The application of the variable interest rate is determined, and the index index is usually applied to the appropriate interest rate using the US Treasury Securities (six-month treasury bill) or the 11th district cost of funds (COFT).

At this time, it is advantageous to use a program with a low margin. This is because the index is inevitably affected by the interest rate market, so it can go up and down as interest rates rise, but the margin (bank profit) is fixed, and once it is set, it must be paid until the entire loan amount is repaid with bank income. Fourth, the balloon mortgage program. The advantage of this loan is when you buy a house and live there for a short period of time. This is because a fixed interest rate with a lower interest rate is applied for a short period of 3 years or a long period of 7 years, rather than a 30-year or 15-year fixed interest rate. On the other hand, people who want to live in the house they are buying for more than 10 years or even 30 years may suffer a loss. This is because when the low interest rate applied for a certain period ends, a higher interest rate may be applied depending on the interest rate situation after 3, 5, or 7 years.

The “Balloon” loan program is advantageous for those who plan to buy a house and live there for 5 to 7 years and then move to another place. Choosing the type of loan to purchase the house you like is not easy. This is because interest rates are always changing. Therefore, it is recommended to seek advice from a reliable financial professional to benefit from the lowest interest rate.