Guide to 30-Year Fixed Rate Mortgage

What is a 30-year fixed-rate mortgage?

A 30-year fixed-rate mortgage is a home loan that offers you 30 years to pay back the amount you borrowed with a fixed interest rate. By fixed rate mortgage, it means that your interest rate would stay the same for the entire duration of the loan.

For instance, a 30-year mortgage that has a fixed rate of 4.5% would be maintained at that rate for the entire 30 years regardless of the changes in real estate market and trends.

This type of loan offers the longest duration in terms of home financing which makes it the exact opposite of bridge loans which have to be paid off within a year or even shorter depending on the agreement with the lender.

30-Year Fixed Rate Home Loans are ideal for families who want to maintain a home on a long-term basis. This makes it a suitable loan type for families who want to raise their kids in a familiar environment.

The Upside and Downside of 30-Year Fixed-Rate Mortgage

Assuming that you’re buying a house that’s worth $300,000 and you’re using a mortgage calculator to make a comparison between 15 and 30-year mortgage options (the most common financing solutions offered by banks, housing authorities and credit unions).

It would seem that the 30-year home mortgage is cheaper since it’s easier on the budget. However, that is only because you are actually looking at a low monthly payment rate.

You might even think that you’re getting a good deal with a lower monthly payment and longer loan term. However, your lender is slapping a higher interest rate on your loan.

Typically, the rate for a 30-year fixed-rate mortgage is 0.5-0.75% higher compared to a 15-year mortgage. Still, this type of mortgage is preferred by home buyers who want to maintain a home on a long-term basis while enjoying the convenience of low monthly payment.

Families who prefer long-term fixed rate loans can focus more on saving money and can manage their household budget more conveniently. It also leaves enough allowance for new investments and other important expenses.

Why Home Buyers Prefer 30- Year Fixed Rate Mortgage

Basically, here’s the deal; a 15-year home mortgage equates to lower interest rate but a higher monthly mortgage payment while a 30-year mortgage equates to a higher interest rate but a lower monthly mortgage payment.

A 30-year fixed rate mortgage makes more sense if monthly cash flow is of major concern or if your income varies to some extent. Since this type of loan comes with the lowest monthly rate, it will naturally leave you with more allowance on your budget every month.

It is, in fact, a good way to get into your dream home while maintaining an affordable and convenient monthly payment. This means that you can focus on increasing your savings or making new investments while keeping your home for a longer time.

Whenever you can, you also have an option to pay down the principal balance faster by way of paying an extra amount with each month.