The mortgage arena is constantly changing. Mortgage lenders and loan products come and go. Guidelines are updated. Laws are enacted. One player in this evolving environment, however, has remained steady, and it’s still one of the most popular mortgages available today – the 30-year fixed rate mortgage.
What Is It?
As the name implies, a 30-year fixed rate mortgage is amortized or repaid over a 30-year term. Every month, part of your payment covers the interest for the previous month, and the rest of it reduces your outstanding mortgage balance. As you pay your loan over time, there is less interest due each month and more of your payment is used to reduce your balance – until it equals zero.
“Fixed rate” means that once you close on this home loan, your mortgage rate (and your required principal and interest payment) can’t be changed.
What’s Great About It?
There’s a reason that 30-year fixed rate mortgages are so popular. The fixed rate means a stable payment, which makes budgeting easier. Knowing that the mortgage rate can’t increase even during inflationary periods is comforting to many borrowers.
Amortizing the mortgage over 30 years makes it possible for more people to buy homes. Before the Great Depression, for example, most mortgages came with terms as short as five years. The home ownership rate during this time was under 50 percent.
What’s Not Great About It?
The chief drawback of the 30-year home loan is the flip side of what makes it great. Your rate won’t go up over time, but it won’t drop, either. People who bought or refinanced homes in early 2011 paid on average just over five percent, and thought they were getting a pretty good deal. Two years later, when mortgage rates had dipped into the low three percent range, not so much. The only way to lower your mortgage rate in a decreasing rate environment is to refinance your loan.
In addition, that 30-year term that creates such a nice low payment has a trade-off. You’ll pay a lot more interest over the life of your loan. Here’s a table showing the total interest on a $100,000 loan, if financed for 5, 10, 15, 20, 25 and 30 years.
|Total Interest Paid||$10,499||$21,494||$33,144||$45,435||$58,351||$71,870|
Who Is it For?
The 30-year fixed rate home loan is the right loan for many folks. If you want to be certain that your mortgage will not change for its entire term, no matter what happens to the economy, it’s a good loan. Others who can benefit from a 30-year fixed rate loan include:
- Home buyers when rates are rising
- Investors (as rents increase over time, the mortgage payment will not)
- FHA and VA borrowers (loans can be assumed when the property sells)
- People on fixed incomes
- People who have trouble budgeting
- Homeowners who wish to stabilize their payments by refinancing out of adjustable mortgages.
How Do You Get One?
It’s easier to qualify for a 30-year fixed rate home loan than for products like adjustable mortgages because it is a safer loan. These loans are sold and backed by a wide variety of providers and qualifying differs between programs. The chart below shows a range of requirements for 30-year mortgages – conventional, community and government products.
|Down Payment||Debt-to-income Ratio||Minimum FICO||Loan Category|