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The recent increase in mortgage rates has started some home buyers to look at programs that have fixed rates for 7 years or 10 years instead of 30 years.
If a buyer believes it is likely they will move or even refinance within this timeframe, these types of programs can be a good option.
The obvious benefit is a lower monthly payment compared to a 30-year program.
Another benefit, which most people underestimate, is the savings in interest.
Today, for example, a buyer would have these options:
- 5.25% 30-year fixed
- 4.375% 10-year fixed
- 4.125% 7-year fixed
Over the first five years of the loan, the buyer would pay the following amounts in interest for each loan program for a $400,000 loan:
- $101,126 for 30-year
- $83,764 for 10-year
- $78,831 for 7-year
So the savings in interest over the first five years compared to the 30-year program is:
- $17,362 for 10-year
- $22,295 for 7-year
