Thinking about getting a 30-year fixed-rate mortgage? Good idea. This granddaddy of all mortgages is the choice of nearly nine out of every 10 home buyers.
It’s no mystery why 30-year fixed-rate mortgages are so popular. The long repayment period keeps monthly payments lower, and the fixed rate means homeowners can count on consistent payments no matter what — although taxes and insurance premiums may change.
Here’s a quick look at the benefits — and some drawbacks — of this popular mortgage.
What is a 30-year fixed-rate mortgage?
A 30-year mortgage is a home loan that will be paid off completely in 30 years if you make every payment as scheduled.
Most 30-year mortgages have a fixed rate, meaning that the interest rate and the payments stay the same for as long as you keep the mortgage.
Advantages of a 30-year mortgage
Lower payment
A 30-year term allows for a more affordable monthly payment by stretching out the repayment of the loan over a long period.
Flexibility
You can pay off the loan faster by adding to your monthly payment or making extra payments, which reduces interest over time, while still having the flexibility to fall back on the smaller payment as needed.
Predictability
It’s nice to count on your mortgage payment staying the same, no matter how stormy the economy gets or how high the interest rates climb, making long-term financial planning easier.
More house for the mortgage
Lower payments mean you could qualify for a more expensive home.
Bigger tax deduction
Current tax laws let home buyers deduct mortgage interest from their taxes. In the early years of a loan, most of your mortgage payments go toward paying off interest, making for a meaty tax deduction.
Disadvantages of a 30-year fixed-rate mortgage
Higher rates
Lenders charge higher interest rates on longer loans because the risk of not getting repaid increases over time.
More interest paid
Even though monthly payments are lower on a 30-year loan, you end up paying significantly more in interest over the life of the mortgage.
Slower equity growth
It takes longer to build an equity share in a home because a larger portion of your early payments goes toward interest rather than principal.
Danger of overborrowing
Qualifying for a bigger mortgage can tempt some people to get a bigger, better home that's harder to afford. Remember to leave a cushion for life’s inevitable surprises.
Higher upkeep costs
If you go for a pricier home, you’ll face steeper costs for property tax, upkeep and maybe even utility bills. A good rule of thumb is to budget 1% to 2% of the purchase price for upkeep.
How to accelerate your savings
With a little planning, you can combine the safety of a 30-year mortgage with one of the biggest advantages of a shorter mortgage: a faster path to fully owning your home. How? By paying off the loan sooner.
Make 15-year mortgage payments on a 30-year loan
The idea is simple. You take out a 30-year mortgage, but you make payments as if it were a shorter-term loan.
To get started, figure out the monthly payment you could afford on a 15-year mortgage. Then, take out a 30-year mortgage, but pay at that higher 15-year level whenever possible.
This gives you a lower required payment as a safety net while still letting you pay off your mortgage faster and save on interest. You can adjust extra payments if your budget changes, keeping flexibility without losing progress toward full homeownership.
Know the trade-offs
This approach isn’t identical to getting a shorter mortgage because the interest rate on a 30-year mortgage will be slightly higher. For example, if a 15-year fixed mortgage has a rate of 5.50%, a 30-year loan might be around 6.11%. Still, by paying extra each month, you can pay off the mortgage faster and save on interest over time.
