We’re going to dissect the most popular loan option – the 30-year fixed mortgage. We’ll outline the benefits and disadvantages of this type of mortgage and examine why this kind of loan works for so many Americans.
What’s A 30-Year Fixed Mortgage?
A 30-year fixed-rate mortgage is a loan with a 30-year term and a fixed rate. The 30-year term means you’ll pay back the mortgage over 30 years. The fixed rate means the interest rate doesn’t change for the life of the loan.
The phrase “30-year fixed” usually refers to a conventional loan, which is a loan that’s not guaranteed or insured by the government. You can also a get a 30-year fixed FHA, VA or USDA loan though; that just means you’re getting an FHA, VA or USDA loan with a 30-year term and a fixed rate.
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Pros Of 30-Year Fixed Mortgages
Let’s look at the advantages of the 30-year fixed-rate mortgage.
Lower Monthly Payments
If you choose a 30-year mortgage over another mortgage term, your payments will be lower. The 30-year term is typically the longest loan term you can get. Extending the life of your loan gives you more time to pay it back, which results in lower mortgage expenses per month.
Some lenders let you make extra payments on your mortgage principal each month. This is a great way to save on interest without committing to a shorter term and a higher required payment. In months when you have extra to put toward your mortgage, you could make a higher payment. In months when you can’t afford extra, you can just pay the minimum.
Buy A More Expensive Home
You may be able to afford a more expensive home if you opt for a 30-year term. When your lender evaluates your loan, they’ll consider how your new mortgage payment fits in with your debt-to-income ratio (DTI). If you can afford a $150,000 mortgage on a 15-year term, you might be able to get a larger mortgage – such as a $200,000 loan – with a 30-year term.
Cons of 30-Year Fixed Mortgages
Here are some of the downsides of 30-year fixed-rate mortgages.
Higher Interest Rate
Your lender will consider you a higher risk when you take longer to pay back your loan. This is because it takes longer for the lender to get the money back from you. Therefore, you’ll be charged a higher interest rate because the lender must ensure that they’ll lose as little as possible if you default on your loan.
It Takes Longer To Build Equity
Every dollar you pay on the principal of your mortgage is one more dollar of your house that you own. Your ownership in the home is known as your equity. If you stretch your payments out over 30 years, it will take longer for you to build equity than if you were to opt for a shorter term.
More Interest Payments
The longer you pay on a loan, the more you’ll pay in interest. The longer term and higher interest rates of a 30-year loan generally mean that you’ll spend more money on interest compared to other loans.
How Often Do 30-Year Fixed Mortgage Rates Change?
Interest rates for 30-year fixed-rate mortgages change all the time – just like other mortgage interest rates. There are a few factors that determine changes in interest rates:
- Mortgage interest rates are influenced by the federal funds rate, which is the rate banks and other financial institutions pay to borrow money. The federal funds rate is controlled by the Federal Reserve.
- The strength of the housing market plays a role in interest rate changes. When there’s a large demand for homes, lenders charge higher interest rates. When the demand for houses is low, lower interest rates entice potential home buyers.
While getting a low interest rate is important, you should also keep in mind that a slightly higher interest rate might not mean much of a change in your monthly payment. For example, on a $200,000 loan with a 30-year term, increasing the rate from 3.325% to 3.375% means that your monthly payment would increase only $18 per month.
The difference in payment isn’t the only thing to consider when shopping for rates. Consider what a lender can offer. You might save a bit of money by going with the cheapest rate, but the tradeoff in the level of service you’re going to get might not be worth it.
How Your 30-Year Fixed Mortgage Rate Is Determined
The rate you see advertised won’t necessarily be the rate you get for your mortgage. Here are some of the factors that go into determining the actual rate you’ll get on your loan.
Your lender will look at your credit score to evaluate how likely you are to pay back the loan. Credit scores range from 300 – 850. Shoot for a credit score of at least 620 to qualify for a conventional loan. The higher your credit score, the lower your interest rate will be on your 30-year fixed mortgage.
Interest rates can also vary depending on the location of your home. Lenders may offer lower interest rates in some states than others.
Home Price And Down Payment
Lenders will typically offer lower interest rates to buyers who put more down. The lower your loan-to-value ratio (LTV), the better your interest rate will typically be.
Lenders offer different interest rates for different types of loans. Adjustable rate mortgages typically have lower rates than fixed-rate mortgages, for example. You may find better rates for VA loans than conventional loans. It all depends on your lender and what’s going on in the market.
A 30-year fixed mortgage is an excellent choice if you’re looking to keep your payment low and predictable. The low mortgage payment can give you more flexibility in your budget, or even enable you to buy a bigger house. However, you’ll end up paying more in interest over the life of the loan.
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