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.
Are in the home buying process and plan to stay in your home for at least 5-7 years.
Are in the home buying process and want to get more house for your money. The lower payments allow you to take out a larger loan because it's easier to afford the repayment over a longer term.
Are in the home buying process and want to continue working toward other financial goals after your purchase. The lower payments allow you to pay off high-interest debt, save for retirement, or even put away funds for an investment property in the future.
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.
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.
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.
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.
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.
What's the difference between a 30-year fixed mortgage and a 30-year ARM?
The interest rate on a 30-year fixed mortgage stays the same for the entirety of the loan. You won't ever have to worry about increasing your payment, making budgeting a little easier as other expenses arise. Though mortgage rates could drop at various points during your repayment period, you always have the option of refinancing if it makes sense.
Adjustable-rate mortgages, also known as ARMs, provide another solution for buyers. Those who choose this loan type benefit from smaller payments during an initial fixed-rate period before the rate fluctuates. ARMs come with different terms, meaning the rate could change after the first three, five, or seven years.An ARM could be worth considering if you're flexible with your job and plan to move before the end of the initial fixed-rate period. It could also be worth exploring if you're making a modest salary now but are expecting a raise or promotion several years from now. Either way, you must be willing to take on the risk of higher payments with an ARM.
Who is a 30-year mortgage best for?
A 30-year mortgage is ideal for those who want to keep their housing costs as low as possible. Younger borrowers may benefit the most from this financing option since they can repay the loan during their working years and be debt-free by retirement. The 30-year mortgage could also be sensible for older buyers with the funds available to repay a loan in their golden years.
Keep in mind that many different kinds of borrowers benefit from a 30-year mortgage. As long as you have a stable income and a solid credit history, there's a good chance that you'll qualify for this loan type. One last thing worth noting: free programs are in place to help you improve your credit score before starting the home buying journey.
Should I refinance my 30-year mortgage?
Homeowners refinance their 30-year mortgage for different reasons. If market rates are lower than your mortgage rate, a refinance could lead to a lower payment. Many borrowers save hundreds of dollars a month by acquiring a lower rate.
Then there's a cash-out refinance, where you can access your equity as cash. Homeowners favor this option when home values are on the rise and their equity skyrockets in a short timeframe. Best of all, you can use the funds for anything you want, such as paying off credit cards or improving your home.
Other motives for refinancing a 30-year mortgage are to get out of an adjustable-rate mortgage or shorten your term. While we already discussed ARMs, a shorter-term mortgage allows you to be done with your home loan faster. That frees up a sizable portion of your income for retirement, paying off other debt, and enjoying life to the fullest!
How can I pay off my 30-year mortgage early?
Strategies such as making an extra payment every year can help you pay off your 30-year mortgage faster. You can speed up your repayment efforts by applying ‘extra' funds like a tax refund, bonus, or inheritance toward your loan principal. Just be sure you don't overlook other financial goals, especially an emergency fund covering three to six months of expenses.