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Among the mortgage terms out there, 30-year mortgages offer stability with the lowest monthly payments. But be mindful of the high interest you’ll pay in the long run.
How does a 30-year mortgage compare to other loan terms?
The biggest difference between a 30-year mortgage and other mortgage terms is the amount of interest you’ll pay over the life of the loan. Depending on your initial rate, you could end up paying close to your initial principal in interest alone.
On a 30-year, $200,000 mortgage at 4.5%, you might pay a lower monthly payment of $1,013. But your total interest paid by the end of the loan would be $164,813.
The same loan and interest rate on a 15-year schedule would result in a total of $75,398 interest, albeit through higher $1,530 monthly payments.
A $200,000 mortgage at 4.5% interest
|Mortgage term||Monthly payment||Total Interest Paid|
Because lenders have a greater chance of not seeing full payment on such a long loan, 30-year mortgages tend to have higher interest rates than their shorter counterparts.
What are the benefits of a 30-year mortgage?
A 30-year mortgage offers a few benefits for homeowners, including:
- Buying a bigger house. With lower monthly payments, a 30-year mortgage could get you a larger loan.
- Saving more in the short term. Lower monthly payments mean more money to stash away in savings or other investments — but you’ll pay more interest in the long run.
- Qualifying for a loan. Lower monthly payments make it easier to qualify for a 30-year mortgage.
What should I watch out for?
Despite their popularity, 30-year mortgages come with a few caveats. With these mortgages, you could:
- Pay high interest rates. Lenders tend to charge higher interest rates on 30-year terms.
- Pay more interest. Smaller monthly payments over a longer time means paying more interest in the long run.
- Build equity slower. Compared to a shorter-term mortgage, it takes longer to build equity and truly own your home with a 30-year mortgage.
Is a 30-year mortgage loan right for me?
The lower monthly payments of a 30-year mortgage offer flexibility in your income — an asset if big life changes are on the horizon. Down the road, you’ll have the option to refinance to shorter terms if you can afford larger monthly payments.
With that said, if you can avoid the high interest on a 30-year mortgage, it could save you money. If you can comfortably pay your mortgage and living expenses, and want to quickly build equity in your home, you may consider a 15- or 10-year mortgage.
ARMs vs. fixed 30-year mortgages
An alternate option to fixed-rate mortgages are adjustable-rate mortgages. ARMs offer interest rates that can increase or decrease after an initial fixed period. For example, a 5/1 ARM has a fixed interest rate for the first five years, and can change annually for the remaining 25 years.
Since your interest can fluctuate after the fixed period, so can your monthly payments and total interest — depending on the market indexes. To compensate, most ARMs start with lower interest rates than fixed-rate mortgages, making them appealing to borrowers.
If you plan on staying in your home for the long term, a 30-year mortgage can offer you the most stability. But if you plan on moving in five years, an ARM can save you in interest and bring down your monthly payments.
Which banks offer a 30-year mortgage?
Some of the many banks offering 30-year mortgages are:
When it comes to flexibility and stability, it’s tough to beat a traditional 30-year mortgage. Low monthly payments coupled with a fixed rate can help you plan your financial future.
But if you don’t plan on living in the house for 30 years or don’t like the idea of paying more interest over the life of the loan, compare other mortgage terms that may better suit your needs.
Frequently asked questions
How can I pay off a 30-year mortgage in 15 years?
Unless your mortgage terms include a prepayment penalty, there’s nothing to stop you from paying off your 30-year mortgage ahead of time.
How can I pay off my mortgage faster?
Refinancing your mortgage to a shorter term is a great way to quickly pay down your mortgage. Moving from a 30-year term to a shorter term often reduces the interest rate on your mortgage as well.
Why would I choose an adjustable-rate mortgage?
An adjustable-rate mortgage — or ARM — often features lower rates and payments early in the term compared to fixed-rate mortgages. This can help you qualify for a larger loan.
These loans can also allow you to take advantage of falling interest rates without the need for refinancing — but rates can rise as well, depending on the market.
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