Government-backed. Conventional. Conforming. ARM. There are so many terms representing so many different loan options that it can be hard to keep them all straight — or learn enough to make an informed decision when it comes to finding the right mortgage. Most people are aware of the 30-year fixed rate mortgage loan (FRM), and for good reason. It’s the most common loan, in large part because of its favorable overall terms along the path to homeownership.
“A 30-year fixed rate mortgage product will work for the vast majority,” said Tendayi Kapfidze, chief economist for LendingTree, which owns MagnifyMoney. He said it’s the most popular loan, but you’ll need to consider your particular circumstances to know whether it’s right for you. “It’s really about understanding your own individual goals and your housing budget to find the loan that fits into that budget comfortably.”
What is a 30-year fixed-rate mortgage?
A 30-year FRM is structured for a 30-year term with an interest rate that does not change over the life of the loan. Stretching the loan amount over 30 years makes monthly payments easier to afford. That long-term affordability is a strong draw for those who may not otherwise be able to purchase a home.
Interest rates for 30-year FRMs may be higher than some government-backed loans, and are dependent on factors including the individual lender and the borrower’s financial picture.
Why is it so popular?
Most people don’t have an extra $253,600 — the median price of a U.S. home, according to the most recent data from the National Association of Realtors (NAR). Paying cash could leave them without sufficient money for daily living or as a cushion for emergencies.
Most buyers choose to finance their home, and 30-year fixed rate mortgages are their loan of choice. Seven out of 10 applicants opted for a 30-year FRM in 2014, according to the U.S. Department of Labor. Estimations are as high as nine out of 10 today.
Benefits of the FRM
Aside from the relative affordability of the monthly payments, the 30-year FRM offers additional advantages:
- Fixed principal and interest payments that stay the same for the life of the loan eliminate the surprises that can come with adjustable rate loans.
- You may be able to refinance to take advantage of interest rate drops or to take cash out penalty-free once your home has appreciated.
Drawbacks of the FRM
For all its advantages, the 30-year FRM does have its downsides. A longer loan period means you’ll pay more over the life of the loan than you would on a mortgage with a shorter term.
30-Year Fixed-Rate Mortgage vs. 15-Year Fixed-Rate Mortgage Comparison
For a $253,600 loan (median U.S. home price)
|Interest Rate||Monthly Payment (Principal and Interest)||Interest Paid||Total Paid|
|30 Year Fixed||4.250%||$1,247.56||$195,521.44||$449,121.44|
|15 Year Fixed||3.625%||$1,828.55||$75,538.86||$329,138.86|
As you can see from the above table, using current rates for 30-year and 15-year FRMs, you can save a tremendous amount of money over the life of the loan with a 15-year fixed-rate mortgage as compared to a 30-year term. You’ll also build equity faster.
However, monthly payments for this loan are also significantly higher. As an alternative, you can opt for a 30-year mortgage and make extra principal payments to get your loan paid off sooner — as long as the loan does not have a prepayment penalty. You won’t be obligated to make these payments monthly, so you can make them as you’re able and conserve funds when you need to.
Additional disadvantages include:
- While a fixed interest rate means stable principal and interest payments, taxes and insurance can still change, so borrowers still have some uncertainty.
- Refinancing may have its advantages, but borrowers will typically incur fees and closing costs.
- You miss out on the introductory or “teaser” rate offered by an adjustable loan. These initial rates can save you a lot of money if you’re prepared to adjust before the rate does (more on this below).
- Qualifying for a 30-year conventional FRM may also be more difficult than qualifying for government-backed loans, depending on the lender. Loans from the FHA and VA typically offer more leniency when it comes to credit scores and income requirements.
Alternatives to the FRM
Weighing loan options when buying a home is always a smart idea. There are several alternatives to the 30-year FRM, most notably adjustable-rate mortgages (ARMs) and 15-year fixed-rate loans.
Fixed-rate loans, regardless of the length of the term, are historically chosen by 70-75% of buyers, with the 30-year term being the most popular. The 15-year loan’s lower interest rate can save you tens or even hundreds of thousands of dollars, as the chart above shows. Today’s interest rate for a 15-year FRM is 3.9%, compared to the 4.45% 30-year FRM interest rate.
The ARM’s low introductory rate makes it a good option for homebuyers who only intend to be in their home for a few years, but the loan can pose dangers to those who don’t pay attention to rates or don’t want to trade lower rates now for future instability. While rate caps on ARMs provide some protection against wild rate swings, homeowners with an ARM may be shocked by the change in their payment when their rate adjusts for the first time, and again when it continues to adjust on an periodic basis. You may also have a prepayment penalty on an ARM.
How to apply for a 30-year FRM
As with any mortgage, it’s a good idea to check your credit before applying for a loan. Especially because 30-year FRMs tend to have higher credit requirements than government-backed loans, you’ll want to make sure your credit score is in a good range and that there are no inaccuracies on your credit report.
The minimum credit score for a 30-year FRM is generally 620, though some lenders may have higher standards. You should consult with several lenders when applying for a loan. Not only do requirements vary, but some lenders may have access to programs with better rates or terms.
Lenders will also consider your debt-to-income ratio (DTI). The maximum allowed is typically 45%, although lenders may allow the DTI to go to 50% for higher credit scores. In addition, you’ll usually have to furnish proof of at least two years of employment income and undergo an employment history review.
It’s also important to remember that monthly payments are impacted by the down payment amount. While 20% remains a benchmark on 30-year FRMs (down payments less than 20% require private mortgage insurance [PMI]), lower down payments are possible. In fact, according to the latest numbers from ATTOM Data Solutions, the median down payment for homes purchased across the country is just 6.6%.
Loans from the Federal Housing Authority have a minimum down payment requirement of 3.5% for qualified buyers, while other programs from Freddie Mac and Fannie Mae offer low- and moderate-income homebuyers the option of putting only 3% down. The tradeoff for those lower rates is PMI, which ranges from 0.45% to 1.05% of the loan amount and can add hundreds of dollars to your monthly housing commitment.
The 30-year fixed-rate mortgage offers several distinct advantages for homebuyers. It certainly has history on its side. If you’re looking for maximum stability and minimum monthly payments, and you meet the credit and income requirements, the 30-year FRM may be a smart choice.
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