30-Year Mortgage Rates
Thousands of 30-year mortgage contracts are signed and sealed every day in the United States, more than any other type. The relatively low monthly payments and respectable terms make these loans very appealing to first-time homebuyers in particular. But is a 30-year loan a good option when compared to shorter and longer loans, and what sort of benefits can it provide?
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Pros and Cons of a 30-Year Mortgage Loan
A 30-year mortgage is often the best option for first-time borrowers. In the short-term, it’s cheaper than a 15-year loan, while in the long-term it offers significant savings over a 40-year loan.
Generally speaking, the interest rate will increase along with your term, but only slightly. However, even if the interest rate stays the same, the increased term can make longer loans incredibly expensive. A longer-term means more interest can accumulate, leading to a greater repayment total over the life of the loan.
As an example, let’s imagine that you borrow $100,000 at a 4% interest rate. This is how your loan might be structured:
- 15-Year Mortgage – Monthly Payment = $739,69; Total Interest Paid = $33,143,79.
- 30-Year Mortgage – Monthly Payment = $477,42; Total Interest Paid = $71,867,97.
- 40-Year Mortgage – Monthly Payment = $417,94; Total Interest Paid = $100,609,58.
If you focus on the bigger picture, the 15-year home loan offers the best terms. You’ll clear the balance in just 15 years, and it will cost you just 33% of the total mortgage value. It’s a viable option for homebuyers as well as real estate investors, as it means the house will become profitable far sooner.
However, $739,69 is a lot of money to spend every month, especially when you consider property taxes, insurance, and utility bills on top of that. What’s more, if that payment causes your debt-to-income ratio to climb too high, mortgage lenders may refuse to provide you with a 15-year term.
The 30-year mortgage, therefore, occupies a neutral middle-ground and is a great option for first time buyers, single-family buyers, and anyone looking to enter the housing market on a budget and without focusing primarily on the investment potential.
On the one hand, it more than doubles the total interest over the life of the loan, but on the other hand, it provides a lower and more manageable monthly payment, keeping your debt-to-income ratio low and giving you more money to invest in your new home. It can help to cover all those additional costs that arise on closing and during the first few months (closing costs, movers fees, furnishings, utilities).
As for a 40-year mortgage, it pales in comparison to all other options. It could be argued that it’s better to have a 40-year term than nothing at all, but we’d counter that argument by insisting that it’s better to wait and focus on improving your credit score, increasing your down payment, and reducing your debt-to-income ratio.
Historical 30-Year Mortgage Rates
In 2008, at the height of the housing crisis, interest rates hit an average of 6.23% for a 30-year mortgage term. On a loan amount of $200,000, this equates to a monthly mortgage payment of $1,228,83 and a total repayment of $442,383,08. If you had waited just 2 years, when fixed mortgage rates had dropped to just 4.86%, your monthly payment would be $1,056,60 and your total repayment would be a more respectable $380,373,07.
Current mortgage rates are more on par with 2010 than 2008 and have been hovering around 3.8% to 4.7% since 2012. These may increase, they may decrease, but anything around 4% is a very respectable rate for a fixed-rate mortgage spanning 30 years.
The Hidden Benefits of a Shorter Term
One of the things that many homebuyers overlook when shopping for a new home is the potential for building equity and refinancing. If you opt for a shorter term, you will build equity quickly, which will make it easier to acquire an equity loan or line of credit in the future and will also provide you with more options for refinancing.
Of course, a refinance should be the last thing on your mind when securing your first mortgage, but it’s an extra safety net. If everything goes wrong and you lose your job or suffer an illness, having a lot of equity could provide you with a high-value, low-interest loan, allowing you to dig yourself out of trouble.
If you take out a 40-year, $100,000 mortgage with an annual percentage rate of 4%, 80% of your first payment will go towards interest, and while this amount gradually improves, it will take over 21 years for you to reach a point where at least 50% of your monthly payment goes towards the principal.
If you drop this to a 30-year term, 70% of your first payment will go towards interest and it will take 12 years for you to reach that same point. With a 15-year term, 55% of your first payment will go towards clearing your balance and all mortgage payments after that will take a big chunk out of the total, giving you a greater share of your home with each passing month.
Many homeowners seem to be of the assumption that paying $1,000 a month means they are $1,000 closer to clearing the balance they owe. But that’s simply not the case and the longer the loan term is, the less of your money will actually go towards building equity.
How to Make a 30-Year Mortgage Loan Easier
As with any loan type, the first step to getting the best rates and terms if to compare all available options. Shop around, look at VA loans, FHA loans, jumbo loans, USDA loans, conventional loans; compare rates from several different providers; consider increasing your down payment or reducing your budget.
We can’t stress this highly enough, but the home buying process is long, stressful, and costly. Many home buyers enter this process with an inflated sense of worth, believing they can afford a purchase price way out of their budget and a monthly repayment that would tip them over the edge. Others choose a house that is on the very limit of what they can afford.
It’s normal to want the biggest and best house for your money, but it’s important to remember that you’re playing with huge amounts of debt here and committing to something that will stay with you for three decades.
By spending a little more time saving and budgeting, not only can you consider a shorter-term and save tens of thousands in interest, but you could also avoid paying private mortgage insurance, get a lower interest rate, and do something that your future self will thank you for.