The USDA loan program provides two basic options when financing a home, a 30 year fixed rate term and a 15 year fixed rate term. It’s important to note that even though the 30 year fixed rate is the most heavily marketed, USDA lenders do have the option of adjusting the term to a 15 year. Why would someone take a 15 over a 30 year? Or, why wouldn’t someone take a 15 year instead of a 30 year since the loan is only half as long. Note, adjustable rate mortgages or hybrids are not offered with a USDA loan.
With a fixed rate, the monthly payment never changes. You can always make extra payments if you want because USDA loans carry no prepayment penalty. But there are definite reasons to choose one over the other. The primary reason the 30 year is the most popular choice is because the payment is lower. Due to the loan amount spread out over a longer period, the payments are lowered. There is a drawback however in terms of the amount of interest paid over the life of the loan. In addition, early in the loan much more of the payment is devoted to interest and less to principal. After the first year or so, you’ll notice the loan balance has barely moved. This is because the interest rate is applied to the outstanding balance and as the loan is gradually paid down, more is allotted to principal.
The 15 year loan, because it’s compressed into a shorter period, pays the lender much less interest over the life of the loan and borrowers build up equity much faster. The drawback on this loan term is the monthly payments are much higher. Let’s look at the interest paid over 30 and 15 years on a $250,000 loan along with the monthly payments. The 30 year rate in this example is 4.00% and the 15 at 3.75%, a common spread.
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See the difference? Even with a slightly lower rate, the 15 year principal and interest payment is much higher. For those who qualify for the 15 year term, it can save lot of interest payments. To help qualify, the 30 year term is the more popular choice.