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The 30-Year Mortgage: Pros and Cons
The 30-year mortgage has long been the go-to loan for most homebuyers. Its combination of long-term stability with reasonable rates and a low monthly payment has made it possible for many Americans to achieve their dream of homeownership, and it will likely do the same for many more people.
Still, despite its many benefits, a 30-year mortgage loan isn’t always the best choice for every homebuyer. These popular loans have many pros and cons, and it’s worth weighing both sides before you decide which type of mortgage is right for you.
Pros of a 30-year mortgage
There are many reasons that 30-year mortgages have consistently endured as the most popular option for American homebuyers. This includes:
- Lower monthly payments: Because you’re spreading your payment out over the longest possible period, a 30-year mortgage will usually get you the lowest monthly payment over the entire loan.
- Bigger or better home: A lower monthly payment means you can potentially afford a home with more space or a home with more of the amenities than you could with a shorter term loan and higher payments.
- Consistent payment amount: Because 30-year mortgages usually come with a fixed interest rate, you can typically plan for what your payments will be. The combined total for your loan’s principal and interest will never change. You’ll still need to account for increases in property tax and insurance rates, but you can rest assured that your loan rate and monthly payments won’t fluctuate.
- Payment flexibility: Just because you have a 30-year loan doesn’t mean you have to take three decades to pay it off. In most instances, lenders are restricted from applying a prepayment penalty after you’ve had the loan for three years, so you can likely increase your monthly payment amount and accelerate your loan payoff at any time — or even refinance to a shorter term. Check with your lender before you do this, but you can often pay more than the minimum without penalty when you’re able.
- Tax deductions: Although the 2017 Tax Cuts and Jobs Act made it more advantageous for many Americans to take the standard tax deduction, more than 13% of taxpayers still itemize their deductions. You may opt to do this because your loan interest can get you a tax break via a deduction. You pay a lot more interest in the early years of a 30-year mortgage, so you may end up getting a decent tax break early on.
Cons of a 30-year mortgage
While there are plenty of upsides to opting for a 30-year mortgage, there are a few downsides to consider as well. Before you sign on the line, you should weigh the potential cons to this type of loan, which include:
- Higher interest rates: These types of loan may offer a lower monthly payment, but 30-year mortgages don’t always come cheap. Interest rates for a 30-year loan are usually higher than the rates for most other mortgage loan types.
- More in total interest: You’ll pay much more interest over 30 years than you would on a shorter-term mortgage. For example, a 30-year, $200,000 fixed-rate loan at 4% would cost you about $53,000 more in total interest compared to a 20-year mortgage loan. That’s money you could have used to save for retirement or other expenses that you’re spending on interest instead.
- Slow equity growth: Depending on a number of factors, it could take you 10 to 15 years before you’re actually paying more on your principal than you are on interest each month. This could slow down the growth of any substantial equity in the home, especially if you don’t have a large down payment to make.
- Not great for short-term homes: Because of your slow equity growth, a 30-year mortgage rarely makes sense for a home you plan to live in for less than five years. Unless your neighborhood values are skyrocketing, the equity you gain in that time won’t offset the costs of selling your home and purchasing a new one.
- Could prompt overspending: The attractive low monthly payment on a 30-year loan might make it tempting to bite off more home than you can afford. A home that costs you $100,000 more to buy will likely also bring higher expenses for utilities, property taxes and upkeep — so keep that in mind if you’re tempted to go outside your budget due to the low monthly payments.
Types of 30-year mortgages
You have two basic options when it comes to a 30-year mortgage: fixed rate or adjustable rate. The differences are significant.
- Fixed rate: The most popular 30-year mortgage is a fixed-rate loan, which, as of the middle of January, had a national average interest rate of about 2.9%. The fixed component means you set your interest rate and monthly payment at the start of the loan and it never changes. If you’re planning to stay in the home for a long time and don’t necessarily plan to refinance, this type of loan is usually a safer bet because it’s predictable and you won’t be in trouble if interest rates rise.
- Adjustable rate: The interest rate on an adjustable-rate mortgage (ARM) is not fixed for the life of the loan. These loans typically come with a fixed-rate introductory period of five, seven or 10 years. After that fixed period ends, your interest rate and monthly payment can fluctuate up or down each year depending on the market. So, a 5/1 ARM, for example, would have a fixed rate for five years followed by a rate that could change every year for the remaining 25 years of the loan. These loans are a great option if fixed-loan rates are high and you plan to move or refinance before the fixed period ends or you’re flipping investment properties. For a long-term home, however, ARMs are a risky move. At a time (like now) when fixed rates are low, ARMs may not even make sense. The national average rate for a 7/1 ARM was about 2.92% as of mid-January — which is just slightly higher than the rate for a 30-year fixed-rate loan.
How do I know if a 30-year mortgage is right for me?
Choosing the right mortgage is all about finding the financial product that serves your needs and helps you meet your long-term goals. Don’t choose a 30-year mortgage simply because it’s the most popular. Review your financial situation, assess your goals and make your own choice instead.
That said, you may be better off with a 30-year mortgage — with a fixed-rate in particular — if several of the following are true:
- You plan to live in your home for a long time — at least five years, if not 10 or more.
- You prefer a predictable payment that you can plan for.
- You want a bigger or better home now rather than later.
- You can put down 20% or more toward the loan.
- The interest on your monthly payment, along with other deductible expenses, would enable you to itemize your deductions and take a tax break.
- Interest rates are low.
If several of the above are false, then you may want to think twice before you take out that 30-year mortgage.
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