If you are in the market for a mortgage, you probably automatically think of the 30-year fixed rate mortgage. That is usually the most popular choice. It offers the lowest payments, which are fixed for the life of the loan. This makes it attractive to many types of buyers and homeowners that are refinancing.
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Is it the best choice though? Consider the following.
It Has the Lowest Payment Out of the Available Terms
The 30-year fixed rate mortgage spreads the principal of your mortgage out over 30 years or 360 payments. This makes the principal payments the lowest possible. If you
have a high debt ratio that makes it hard to get a mortgage or you simply can’t afford a higher payment, the 30-year term could be a good choice.
Keep in mind, though, if you are refinancing and you already had a 30-year term, you will reset your term back to square one if you take another 30-year term. For example, if you’ve already paid 10 years on your loan and now you want to refinance because rates dropped, you probably don’t want another 30-year term. You’ve likely knocked your principal balance down a bit, which should make your amortized payments lower. See if you can afford the 20-year term before jumping on the bandwagon of a higher term and increasing the length of time it takes to pay off your loan.
You Can Make Extra Payments
One of the best things about the 30-year term is that you can make extra payments towards the principal. Let’s say you are on the fence about taking a 15-year term rather than the 30-year term, but you are nervous. What happens if you suddenly can’t afford the 15-year payment? If that’s the loan you took, you are stuck.
If you take a 30-year term, though, you can make 15-year payments when you can afford it. If this means a couple of times a year or every month, it’s up to you. This gives you the option to cut down the time it takes to
pay off your loan if you can. If not, you only owe the minimum 30-year payment.
You Don’t Have to Worry About Adjusting Interest Rates
Sometimes an ARM loan can look enticing. That introductory interest rate can make it tempting to take the ARM. After a few years, though, that rate will adjust. You have no way of knowing just what it will adjust to because it’s based on a market index plus the predetermined margin.
The 30-year fixed rate mortgage payment never changes. The rate you lock in before you close is the rate you get for the entire term of the loan. The only way your rate would change is if you refinance your loan in the future.
You May Qualify for a Higher Priced House
Some borrowers opt for the 30-year mortgage because of the lower payments. A lower payment may mean you can afford a higher mortgage amount, which may equal a higher purchase price. While you should only buy what you can afford, using the 30-year term can be a way to make the payments more affordable.
It May be Easier to Qualify for the Loan
A 30-year fixed rate loan, as we discussed above, has lower payments. This means it may be easier to fit it into the required debt ratios. For example, conventional loans require a 28% maximum housing ratio and FHA loans require a 31% maximum housing ratio. If you were to take out a 15-year term, your payment would be much higher since you have to pay the loan off in half of the time. This could make your housing and therefore total debt ratio too high for the program’s guidelines.
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You May Have More Disposable Income
Your disposable income is the money you have left at the end of the month after paying your obligations. It’s the money you can use for savings, the daily cost of living, and/or splurges. If you have a shorter term, you’ll have a higher mortgage payment, which could eat into your
disposable income.
The Downside of the 30-Year Mortgage
Of course, there are a few downsides you should consider when deciding if the 30-year fixed rate mortgage is right for you. The things you should consider include:
- You’ll pay more interest. The longer you borrow money from a bank, the more interest you will pay. While you can make extra payments to get your principal paid down faster, you will still end up paying more for the loan in the end
- You’ll build equity slower. Just as you’ll pay more interest, you’ll also build equity at a much slower pace. Your mortgage payment is comprised of mostly interest during the first couple of years of having the mortgage. This means you pay less principal and build less equity in the home.
Take all of these points into consideration when you decide if the 30-year fixed rate mortgage is right for you. Some people need the lower payment and don’t mind the extra interest they will pay. Some borrowers take the lower payment so that they don’t have the worry of a higher required payment should their income change. In the meantime, they may make extra payments to get the principal paid down.
No two borrowers will have the same conclusion, though. Some borrowers want to pay the least amount of interest as possible, while others want to keep the lower payments. Weigh the pros and cons of each term and decide how you can make the most of your loan choice.
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