The 30-year fixed-rate mortgage is as American as white picket fences. Like apple pie, the 30-year fixed has been fueling the American Dream for decades.
With all the different types of mortgages and potentially confusing lingo, first-time home buyers may have trouble figuring out which home loan will work best for them, or what the heck a 30-year mortgage even is.
Is a 30-year fixed-rate mortgage a good fit for you? Here’s the lowdown.
What Is a 30-Year Fixed-Rate Mortgage?
Let’s break this down: “30-year” refers to the term of the loan, meaning you’ll make monthly payments for 30 years. After that, you’ll own your house. Sounds like a long time, right? These mortgages are good for people who plan on staying in their home long-term.
“Fixed rate” refers to the interest rate. With some mortgages, your interest rate will change after a predetermined number of years. With a fixed-rate mortgage, you don’t ever have to worry about the interest rate changing.
Is It Better Than Other Types of Mortgages?
It depends on your situation. The 15-year fixed-rate mortgage, another popular choice, is a shorter-term mortgage that’s good if you want to pay off your mortgage faster. The 15-year has a higher monthly payment, but you’ll pay less in interest than with a 30-year term – not only does a 30-year have a higher interest rate than a 15-year, but you’ll also accrue more interest because the loan takes longer to pay off.
You also might consider an adjustable rate mortgage (ARM). ARMs are 30-year loans that can offer lower fixed interest rates for the first few years of the loan. Then, after a specified amount of time, your rate will change every 6 months based on the market with caps in place for the maximum rate you can pay.
ARMs can be good for people who don’t think they’ll stay in their home long-term, but they might feel like a bit of a gamble, as it’s hard to know whether your rate will go up or down after the fixed period has passed.
How Do I Know What’s Right for Me?
All the different choices you’ll have to make when you’re in the market for a home loan can make your head spin. Luckily, doing a little bit of research can help narrow down your choices.
Do you only plan on staying in your home for a few years? Do you have a big financial event coming up, like a kid going to college? If so, you might want to look at an ARM or a 15-year fixed.
Is paying off your house quickly important to you, even if it means you have to shoulder a higher monthly payment? Again, a 15-year fixed could be a good fit for you.
None of these options sound quite right for you? A 30-year fixed-rate might be just right for your particular financial situation. Just consider the pros and cons:
- Lower monthly payment
- Greater flexibility – you don’t have to worry about a high monthly payment, but you can always pay more than your minimum to pay it off faster
- Predictable – no need to worry about rising interest rates
- Pay more in interest
- Not ideal if you plan on moving in five or 10 years
- Takes longer to build equity
30-year fixed-rate mortgages offer a solid, conservative option for cautious or long-term borrowers who want to be certain they can make every payment. Ultimately, it’s going to be up to what works best for your financial situation and future plans. Knowing the basics can help take some of the headaches out of the home buying process.
Ready to start the mortgage process? Visit Rocket Mortgage today.