The Pros and Cons of the 30-Year Mortgage

Recently, the 30-year fixed home mortgage (by far the most popular home loan available) has come under some scrutiny. Some argue that the loan should no longer be subsidized by private lenders, while others argue that it is the only way that most individuals would ever be able to eventually own a home. For now, though, the 30-year mortgage is here to stay, so here are some pros and cons of the loan that might help you decide if this is the right loan for you.

Pros: Affordability and Stability

One of the biggest draws of the 30-year mortgage is that in terms of monthly mortgage payments, it is often the most affordable. While many lenders recommend a 15-year mortgage, as the shorter loan term will reduce interest rates and help you pay off the loan more quickly, the increased monthly payments are simply not an option for many families. Moreover, the 30-year mortgage is offered at a fixed rate, meaning that your interest rates and payment amounts will not change over the life of the loan, unless you opt to refinance. This can be incredibly useful to those who need to do some long-term budgeting.

Pros: Initial Payments and Refinancing Options

The 30-year fixed rate mortgage also draws most homebuyers due to its low down payment requirements: often, buyers only need to put down 5% of the overall cost. These decreased down payment amounts generally apply even for those who qualify for hefty mortgages (loans can reach $3 million). Another benefit of the 30-year mortgage is that due to the long repayment period, it is fairly simple to arrange for refinancing when necessary. Thus, if interest rates improve over the life of the loan, you can refinance partway through to reduce your overall interest payments. The refinancing option can also be helpful if your house needs repairs, or if you need to consolidate debt under a lower interest rate.

Cons: Issues of Retirement and Major Expenses

For some, the 30-year mortgage option might be ideal. Yet this particular home loan might present some drawbacks to other homeowners, depending on their life stages, job situations, and family plans. For example, a 30-year mortgage would not be the best option for someone who is 15 years away from retirement. It might also present some difficulties to families who will be sending their children off to college at some point, since paying a mortgage on top of college tuition can be incredibly taxing on a family budget.

In an age when people move frequently for work and family-related matters, a 30-year mortgage can also be somewhat of a hassle. Of course, the biggest drawback of the 30-year mortgage is the amount of interest paid over a long term. In short, this mortgage is not the best way to save money on a home loan. To decide if this is the right home loan for you, take the time to plan out a long-term budget, and consider career, family, and retirement plans as well.

What Rising Interest Rates Mean For You

Mortgage interest rates have been steadily increasing over the past few months, and in recent weeks have experienced significant gains. Currently, interests rates hover close to 4%, and analysts predict that they will continue to climb. As a potential homebuyer, you may wonder what this means for you. Is it still a good time to buy? Is the housing market in distress? Though there has been some debate on this point, the ultimate answer to both of these questions is no

The Skeptic’s Concerns

Though market prices in every sector always fluctuate, the rising mortgage interest rates have sparked more debate than usual. This is largely due to the real estate market’s role in the financial crisis of 2008; that economic crash is still fresh in everyone’s mind, so any small change in market price or value is closely scrutinized. Some sellers feel that an interest increase will reduce their sales, thus sending the demand for homes back down. Other individuals worry that these rate changes are a sign of too much stress on the market in general.

Signs of Recovery

It is natural to view any sort of rise in home prices with some skepticism. After all, no one wants to end up paying more for his or her home, particularly when prices have been at record lows for the past few years.  Yet rather than viewing the rate increase as detrimental to the market or to your wallet, however, try to look at the bigger picture. That is, the steady rate increase signals an increased confidence in real estate—prices are going up because demand is increasing and supply is decreasing. This is a far cry from several years ago, when thousands of empty and foreclosed homes—with low interest rates—stood waiting to be sold.

The Final Verdict

While the increase in mortgage interest rates is not a bad thing, it is important to keep an eye on prices, as these are connected directly to a property’s value—if they go too high, appreciation will slow down. Still, on the whole, now is still a smart time to apply for a home loan. In fact, the success of the market relies on the confidence and buying power of the consumer; if everyone panics in the face of mortgage rate increases and opts not to buy a home, then the market will indeed suffer. Just keep in mind that a slight rise in interest rates is not only a normal part of the market’s cycle, but is also a signal that the economy itself is improving

If you do decide to invest in a home before interest rates increase any further, just be sure to work through a reputable lender. If any institution tries to charge you a mortgage interest rate over 4%, shop around before you sign anything. With the exception of seller financing, which is bound by fewer restrictions, all mortgage transactions should adhere to market trends, so do a bit of research into current interest rates before applying to ensure you’re getting a fair deal.

Tailoring Your Mortgage: Rate Structures and Repayment Plans

There are a number of things to consider if you are embarking on the process of applying for a mortgage, and one of these is choosing the type of loan you want. More specifically, this means choosing the best interest rate plan for your financial situation. While the housing market dictates these rates to a certain extent, there are still a variety of different rate structure options from which potential homeowners can choose.

Adjustable vs. Fixed Rate Loans

 In terms of home loans, the best case scenario is one where you can lock in a fixed interest rate. Fixed rate mortgages are fairly common (they’re often simply called “traditional” mortgages), and will offer the most stable payment plan. Interest rates are decided upon signing, and each month you’ll pay a portion of the principal plus that interest until the loan is paid off. Loans with adjustable rates are trickier, since the rates change over time. They seem appealing at first, typically because lenders will offer a low interest rate, but these rates can skyrocket quickly, depending on the market. It is best to avoid these unless you know you plan to finance or resell soon.

Simple Rate Loans

Like adjustable interest rate mortgages, simple interest mortgages come with variable interest rates—though these rates change every day. The specific formula for calculating this daily interest is: (principal balance x daily interest rate)/365. As long as you are able to stay current with your mortgage payments, this can be a sound option. Compared to other rate plans, this works best for those who know they can pay off more of the mortgage earlier in the loan term, since there is no penalty for paying extra. If you fall behind on payments, though, you’ll face some difficulty, largely because the amount of principal owed will increase, which will increase your overall payment.

ARM and Interest Only Mortgages

Those who are on a stricter budget might want to consider an interest only mortgage. These are fairly self-explanatory: once your loan repayment term begins, you’ll only pay down the interest for a designated period of time. Once that time is up, you’ll start paying down the principal as a separate loan. ARM mortgages are similar, though these provide homeowners with a bit more flexibility, allowing them to choose whether they want to pay interest or interest plus principal. These mortgage structures make most sense for borrowers whose income levels fluctuate quite a bit, or who know that their salaries will definitely increase in the near future.

Additional Options

Balloon loans, reverse loans, and graduated payment loans are additional options for those who know that they will have trouble making their mortgage payments early on, but will be more financially stable down the line. Of the three, graduated repayment loans are probably the best option, since the payment amount increases gradually, and it is still possible to get a fixed interest rate. Balloon and reverse mortgages are much riskier: balloon loans require you to pay one large lump sum at the end of the loan term, and reverse mortgages increase the amount of principal due every month.

Rather than opt for a risky interest or repayment structure that might backfire down the road, borrowers in financial straits might want to consider the range of government home loans available to them. These come with their own set of regulations and restrictions, but they can potentially save headaches down the road.