For first-time home buyers, mortgage decisions will impact nearly everything else in the home buying process. A 30-year fixed mortgage is one of the more common options for loan repayments, and for first-time buyers it can be the best place to start, so long as you know what you’re getting into.
The Home Loan Expert has made a habit out of getting buyers through the borrowing process with flying colors, and our team is happy to provide a better look at the details of a 30-year mortgage. Read on to find out if this type of mortgage is right for you!
What Is a 30-year Fixed Mortgage?
To put it plainly, a 30-year conventional mortgage is a repayment plan in which you will pay back your home loan over the course of 30 years, or 360 monthly payments. Given the longer term, your monthly payments will be lower compared to a 15-year or other shorter-term mortgage, but the interest rate will most likely be higher.
As a fixed-rate mortgage, this type of loan repayment is fairly straightforward for buyers, since the interest rate will stay the same over the course of the loan. Regardless of inflation, home value, or any other factors, your monthly rate in year one will be the same as in year 30. Check out our mortgage calculator to learn what your payments might be with various loan amounts and interest rates.
Pros and Cons of a 30-Year Mortgage
A 30-year mortgage is one of the more popular mortgage options because of the lower payments. But is it the right plan for you? Ultimately, it depends on what your top priority is when it comes to finances.
- For many buyers, it is impossible to overstate the significance of a lower monthly payment. If you have other sources of debt, other major expenses, or limited income, a lower monthly payment can be the only way for you to afford a mortgage. For those still getting a grasp on their finances, a long-term mortgage can be a great way of realizing your home-owning dream.
- Since banks will often lend more in the case of a long-term loan, you can get a jump on your full dream house sooner than later. So long as you go into things with a clear plan and are responsible while planning for your repayment, a larger loan can get you closer to the house you want right out of the gate.
- The higher interest rate can be a big problem for a lot of buyers. Over the course of your mortgage, a higher interest rate means you pay back more than the initial value of the home, and with a larger number of payments (360 total), that increase can be significant. The lower payment amount can be tempting, but in the grand scheme of things it can cost you tens of thousands of dollars, if not more. As an example, if your initial loan is $500,000 with a 30-year mortgage and an interest rate of 2.8%, over the course of the repayment you will pay over $730,000!
- Speaking of the larger number of payments, a long-term mortgage means you won’t own your home outright for a longer period of time. Because equity, or how much you have paid of your mortgage vs. how much the home is worth, is so necessary for those investing in housing, this can be a serious drawback; a longer payback period means it will take longer to gain necessary equity. In this case, it will take 30 years before you own your house free and clear, and if you decide to resell before then, you may not be able to break even for many years after closing.
- A bank is typically willing to lend you more total money with a higher interest rate. In many cases, this can be a blessing, but if you over-borrow you can find yourself in hot water. If you look at the situation we mentioned above, a $500,000 house can seem relatively affordable at just over $2,000 a month, but given the total repayment to the bank and any upkeep that comes with that much house, you may find yourself stretched too thin over time.
For those just getting to a place of being able to afford a home, a 30-year mortgage is a great gateway. Likewise, if you’re a savvy investor, the extra monthly wiggle room will give you more options for where and how to stretch your dollar. In the end, it all comes down to what you are comfortable with, and if that changes then refinancing your loan is an option.
How Are 30-Year Mortgage Rates Determined?
A 30-year mortgage rate, like with nearly any other loan, is set based on a variety of economic factors, but ultimately the policies of the Federal Reserve are the final say in determining how individual banks operate their lending. In order to get the best interest rate for you and your situation, we always recommend that borrowers shop around for the best rate rather than simply signing up with the first lender they see.
In order to qualify for a loan, banks will look primarily at your income and credit score to determine what size loan to offer you. Because of the nature of a 30-year mortgage, it’s easier to qualify for than a shorter-term mortgage loan, but you will still want to make sure that your finances are in order before going to the bank. And if you decide later that you would rather save money in the long term with a lower interest rate, you can always refinance into a shorter mortgage!
The Home Loan Expert team is here to get you the mortgage help you need quickly; whether you want to purchase a home at a 30-year rate or have decided you’re ready to move on from this repayment plan and want to refinance your existing mortgage, our five-minute loan approval can get the process started in no time.
If you’re unsure whether a 30-year mortgage is right for you, our experts are happy to walk you through your options. Give us a call at (866)-221-1926 or take advantage of the Live Chat option on our website!