If you’re purchasing or refinancing a house the 30-year fixed-rate mortgage was and is currently the staple of the broader mortgage market. The 30-year mortgage has its pros and cons and here is what you should know when looking at a 30-year mortgage, then you can decide which makes the most financial sense.
Every mortgage loan product has pros and cons. There is no one-size-fits-all perfect mortgage loan type. The 30-year mortgage is extremely affordable as it provides the lowest monthly mortgage payment which allows you to plan a budget. If payment is what you’re after, the 30-year mortgage is it.
The first several years of 30-year fixed rate goes to interest and it’s not until month 120 or e.g. when the 10 year marks the inverse and starts to occur and most of your payment starts going to principle rather than interest. The 30-year mortgage in today’s market does not contain prepayment penalties and allows you to pay off the loan anytime. Some lenders even will allow you to take cash and re-cast your mortgage payment which will make your mortgage payment drop without having to go through another mortgage process. New American Funding is one such lender that offers that benefit.
As for the 30-year mortgage, it’s a good loan to get into a house and get acclimated to home ownership or use it to pay off debt and drive affordability. What it’s not good for, is for the long-term plan if you intend to live in the house for the big picture because it takes so long to pay off e.g. 360 months.
It goes without saying that if you borrow $300,000 for example, or any loan amount, you end up paying double that back, so you end up repaying $600,000 on your original $300,000 loan because the loan is amortized over 360 months. Everyone loves the payment, but they hate the interest they pay on this loan so making extra principal payments or even making a 13th payment every year which is equivalent to biweekly mortgage payment is a smart move.
Another opportunity that you might want to consider in the future when things are financially better would be moving to a shorter-term loan such as a 20-year loan or even if do-able, 15-year loan when your financial scenario supports it. Still the 30-year mortgage is smart, safe and prudent; however, after a few years of having that loan and making that payment month in and month out most start to think “what can I do to reduce the interest expense?” One of the best ways to do that is to prepay the loan or if and when possible move into a shorter-term structure.
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Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.