30-Year Mortgage

How it Works

A 30-year mortgage is one of the most popular loan options available. For one thing, a 30-year mortgage typically ensures the lowest possible payment for borrowers. The flip side is that you'll accrue more interest with a longer repayment period.

However, if you offer less than a 20% down payment, expect to pay private mortgage insurance (PMI) until you've reached 78% loan to value (LTV). Keep in mind that PMI is often less expensive than the monthly mortgage insurance that accompanies an FHA loan. Still, PMI can add hundreds of dollars to your monthly housing expenses.

Understanding how your mortgage amortizes is a great way to know which loan option is best for you. Get your questions answered and find a custom loan that makes sense for your financial goals. It just takes one call to one of our salary-based mortgage consultants.

Additional disclosures

What you need to know about 30-year mortgages

A 30-year mortgage is a home loan paid off in 30 years if the borrower stays current with payments. Borrowers can choose from several 30-year mortgage options, including conventional, FHA, VA, and USDA. All of these loan programs, except conventional, are backed by the government.

As you pay off a 30-year mortgage, your funds will primarily go toward principal and interest. The principal is the amount you borrow from a financial institution to buy your home. For example, if you buy a $500,000 property and use a 20% down payment of $100,000, the remaining principal would be $400,000.

Think of interest as the fee to borrow money from a lender. While 30-year fixed mortgage rates depend on factors such as world news and program type, you can do several things to ensure you obtain the lowest interest rate possible. These include paying down debt to improve your credit score and landing a higher-paying job to bolster your debt-to-income ratio (DTI).

No borrower should finance a property without having a solid understanding of the loan's amortization schedule. In short, the funds from your monthly payment are applied to the principal, interest, escrow, and mortgage insurance. You may also need to budget additional funds for homeowners association (HOA) fees.

Choosing a 30-year mortgage means most of your mortgage payment will go toward the interest in the first few years of repayment. But the good news is that you'll still build equity as you pay down the principal and home prices increase. Plus, mortgage interest could be tax-deductible depending on how you file.

The pros and cons of a 30-year mortgage

For decades, the 30-year mortgage has helped Americans achieve their homeownership goals and build generational wealth. Still, knowing the advantages and disadvantages is critical before assuming this loan option is right for you. Let's take a closer look.

Pros

• Lower monthly payments
  Rising home prices make a 30-year mortgage even more attractive. With cheaper payments and more time to pay off your loan, you can also work toward other financial goals, such as saving for retirement or paying for college. The 30-year mortgage is ideal for those on a tight budget and borrowers wanting to keep housing costs to a minimum.
• Flexibility
  You never know what could happen in your life over 30 years. That's why it's nice knowing that you'll have the same monthly payment, regardless of unexpected circumstances such as a job loss. You'll also have the flexibility to make extra payments or add a little to your payment if your finances are in order.
• Can afford a more expensive house
  It's no secret why folks hoping to stretch their home buying budget as much as possible usually turn to a 30-year mortgage. Since your payments are spread out over 30 years, you may qualify for a larger loan. Remember that just because a lender approves you for a certain-priced home doesn't automatically mean it's the right long-term move for your family. The last thing you want is your mortgage payment to consume most of your monthly income.

Cons

• Longer repayment period
  Making a house payment for 360 consecutive months can be scary for some buyers. Will you be able to stay current with your loan even with the occasional lapse in income? Plus, depending on when you purchase your home, you could be working well past the ‘traditional’ retirement age to afford the monthly payments.
• More interest paid
  You could end up paying hundreds of thousands of dollars in interest with a 30-year mortgage. That's a lot of hard-earned money, regardless of your profession and salary. Borrowers who opt for a 30-year loan must be comfortable knowing they'll spend significantly more interest than someone with a 15-year mortgage, for example.
• Takes a while to build equity
  As we mentioned above, you build equity as you make payments and home values increase. However, building equity with a 30-year mortgage takes longer since most of your payment goes to the interest in the first few years of repayment. But the slower journey toward full ownership of your home may not be a big deal if you see yourself living there for a long time.

How does a 30-year mortgage compare to 15-year options?

Maybe you're looking for a $500,000 home and are debating a 15- and a 30-year mortgage. A 15-year loan with a 3.25% rate and a 15% down payment would yield a monthly payment of almost $3,500. That's a pricey commitment for any household, especially if you anticipate other large expenses, such as renovations or upgrades, after moving into your home.

Now, what if you went with a 30-year mortgage instead? The same down payment with a 4% rate equates to a monthly payment of about $2,500. While that's still a significant financial obligation for three decades, it's still much more reasonable than a $3,500 payment and provides the flexibility you may need down the road.

Other than the repayment time, the key difference between a 15-year and a 30-year mortgage is the interest rate. In your conversations with lenders, you'll find that 15-year interest rates can be anywhere from half to three-quarters of a point less than 30-year rates. While that might not seem like a notable difference, it could add up to tens of thousands of dollars in interest.

Your best bet is to run the numbers multiple times before making this decision. Those who select a 15-year loan typically either have high-income jobs, large cash reserves, or a mix of both. Lenders want to know that you can handle these higher payments, even if it is for half the time.

Again, if you're on a tight budget and aren't comfortable with an even higher monthly payment, ask your lender about 30-year mortgage rates. You'll be able to make additional principal payments as it works for you, and you won't have to put off other financial goals in the process. Don't forget about the possibility of refinancing to a 15-year mortgage in the future, either.