The top 5 reasons you should NOT finance a home with a 30-year mortgage
In 1938, the Federal National Mortgage Association (also known as Fannie Mae) was established to add some stability and liquidity to the mortgage industry. Even so, it wasn’t until 1948 that Congress authorized the use of 30-year terms on newly constructed homes and 1954 for existing homes.
So, what made the 30-year loan more appealing than a 15 or 20-year loan? Affordability. More people were able, for the first time, buy a home which became the American Dream. But, just because it may be the most “popular” loan, is it the best loan? Let’s look a 5 reasons you may NOT want a 30-year loan.
While the monthly payment may be less, the overall result is that you’ll pay more interest compared to shorter-term loans.
It can take roughly 20 to 22 years of payments before more of your payment goes towards principal instead of interest.
Most people will refinance to get a lower interest rate every 3 to 7 years back into another 30-year loans, thus starting the process all over again.
Many homeowners will sell & move in 5 to 7 years with less equity than they would have had with a shorter term mortgage.
A 30-yr mortgage has a higher rate of interest than shorter term mortgages.
Alternative Options or Stategies You Should Consider
Bi-Weekly Payments
If you decide that you can afford a short term mortgage (as noted below) but the lender says you cannot qualify for that payment, you can go with the 30-year loan but plan to make extra principal payments. There is no required way to do this. I’ve seen people make bi-weekly payments or pay extra with their regular monthly payment or pay extra each quarter or just make an extra payment annually (such as when you get a income tax refund).
Fixed Rate But Shorter Term
Most lenders will offer a 20-year, a 15-year and even a 10-year mortgage option. Inquire about both. It’s been my experience that the interest rate on the 20-year loan is very close to the 30-year loan. A 15-year loan offers the best interest rate. Of course the shorter term means you’ll have a higher payment, so this should be considered.
Just because an interest rate can adjust don’t assume that it will always go up. Do your own research. Discuss this option with your lender. Find out what index the rate is tied to and what the interest rate caps are. This can be especially beneficial if you only plan to be in this home for a short period of time.
All-in-One Mortgage
One of the biggest concerns most people have with paying extra principal is that those funds are no longer available in case they need it for an emergency. The All-in-One (AIO) loan fixes that. The AIO is similar to a Home Equity Line of Credit (HELOC) but offers many more benefits. Because of how the loan is structured, it can actually pay off much faster than the typical loan without paying extra!
The All-in-One is very popular in Canada and several European countries. It’s been in the US for roughly 20 years but most people have not heard of it, quite frankly, because most lenders don’t want to offer it. If you’re saving thousands of interest on your mortgage, guess who’s earning less interest? The lender. That’s why you haven’t heard of it.
The AIO has several benefits but it’s somewhat harder to qualify for. Borrowers must have a credit score of at least 700. The debt-to-income ratio cannot exceed 41%. And, the borrower must have liquid assets (i.e. bank accounts, savings, retirement accounts) that equal at least 10% of the proposed loan amount. So, if you are seeking a $300,000 loan, you would need to show proof of assets equaling at least $30,000.
The AIO is also available for investment properties.
Reverse Mortgage
If you are at least 62 years of age (some programs start at age 55), you may be able to qualify for a Reverse Mortgage and enjoy your home free of any mortgage payment. Yes, this can even be done on a home purchase. You can get more information here.
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Buying a home – 15 things you should watch out for
Your interest rates on a 30-year fixed-rate loan will be higher, even though it will stay the same throughout the life of the loan. When you get a 30-year fixed-rate loan, your mortgage lender's risk of not getting paid back is spread over a longer period of time.
Your interest rates on a 30-year fixed-rate loan will be higher, even though it will stay the same throughout the life of the loan. When you get a 30-year fixed-rate loan, your mortgage lender's risk of not getting paid back is spread over a longer period of time.
Why Dave Ramsey isn't a fan of a 30-year mortgage. The problem with taking out a 30-year mortgage is getting stuck with not only a higher interest rate on your home loan, but also paying more interest on that loan than you would with a shorter-term loan. In fact, Ramsey isn't a fan of paying mortgage interest.
With a 30-year mortgage, the main disadvantages are you are paying a higher interest rate, you spend more in interest over the course of the loan and you'll be paying off your mortgage for a longer period of time. It also takes longer to build equity in your home.
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
As far as the simple math goes, a $200,000 home loan at a 7% interest rate on a 30-year term will give you a $1,330.60 monthly payment. That $200K monthly mortgage payment includes the principal and interest.
These loans allow for lower monthly payments than shorter-term loans, which can make homeownership more affordable for a lot of people. But if you sign a 30-year mortgage in your 50s and you don't accelerate your payments, then you can pretty much bank on not paying off your home until you reach your 80s.
If you can demonstrate an ability to repay the loan before you're 75 years old, they will consider your application no matter your age! For example, if you needed to borrow $300,000 and were 50 years old, the standard 30-year mortgage term could be reduced to 25 years and your loan would be approved.
The interest rate on a loan directly affects the duration of a loan. Note: The interest rate is calculated using the hit and trial method. Therefore, it takes 30 years to complete the loan of $150,000 with $1,000 per monthly installment at a 0.585% monthly interest rate.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
With a mortgage refinance, you can shorten your loan term by selecting a 20, 15, or even a 10-year loan. By selecting a shorter term, your monthly payment may increase. However, many homeowners are earning more today than when they first bought their homes.
Absolutely. The Equal Credit Opportunity Act's protections extend to your mortgage term. Mortgage lenders can't deny you a specific loan term on the basis of age.
(To be fair, this applies to home buyers at any age, and not just 30-somethings.) But you may also be curious as to what other people your age are borrowing to finance a home. Personal Capital reports that the average mortgage balance among people in their 30s is $337,526.
A 15-year mortgage costs less in the long run since the total interest payments are less than a 30-year mortgage. The cost of a mortgage is calculated based on an annual interest rate, and since you're borrowing the money for half as long, the total interest paid will likely be half of what you'd pay over 30 years.
People with a 15-year term pay more per month than those with a 30-year term. In exchange, they are given a lower interest rate. This means that borrowers with a 15-year term pay their debt in half the time and possibly save thousands of dollars over the life of their mortgage.
A 15-year mortgage means larger monthly payments, but a lower rate and substantial savings on interest. A 30-year mortgage gives you a more affordable monthly payment, but expect higher borrowing costs overall. You can also take out an interest-only mortgage or pay your loan off early to maximize interest savings.
Introduction: My name is Kerri Lueilwitz, I am a courageous, gentle, quaint, thankful, outstanding, brave, vast person who loves writing and wants to share my knowledge and understanding with you.
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