Reasons to Choose a 30 Year Fixed Rate Mortgage

A 30 year fixed rate mortgage is the probably the most popular type of mortgage in America.  Other types of loans have become more popular in recent years, but for most people, the 30 year mortgage is the standard for residential home purchases.  Here are a few good reasons why the 30 year fixed mortgage is still the best choice for most people.

Decades ago, it was common for people to buy homes with a 15 to 20 year mortgage loan. However, most homes are now so expensive that the monthly mortgage payment on a loan with such a short term is too much for the average homeowner to manage. Thirty year mortgages gained in popularity when house prices started rising to the point where homes were unaffordable for most people to buy using shorter loans.

The 30 year fixed rate mortgage offers twice the amount of time for repayment as a 15 year mortgage and 50 percent more time than a 20 year mortgage. This can result in a significantly lower payment for the buyer who stretches their mortgage out over thirty years. Here is a comparison of payment amounts for a $100,000 mortgage at 6.5% interest:

15 year mortgage: $871.11

20 year mortgage: $745.57

30 year mortgage: $632.07

As you can see, a 30 year mortgage makes buying a home much more affordable. It allows families to buy higher-priced homes than they would be able to otherwise. And in many areas, home prices are high enough that many families would not be able to purchase a home at all if it were not for 30 year mortgages.

Although the monthly payment continues to decrease if you lengthen the term of the mortgage past thirty years, the savings are not as significant and it becomes more difficult to justify the additional interest expense. Using the same example as above, the payment on a 40 year mortgage would be $585.46. Let's compare that savings to see how it stacks up.

The 20 year mortgage saves $125.54 per month over the 15 year mortgage but takes 5 years longer to pay off.

The 30 year mortgage saves $113.50 per month over the 20 year mortgage but takes 10 years longer to pay off.

The 40 year mortgages saves $46.61 per month over the 30 year mortgage but takes 10 years longer to pay off.

A 40 year mortgage is suitable in some cases when the buyer has bad credit or doesn't plan to live in the house very long, but for most people the amount of savings in the monthly payment does not justify the extra interest cost or the ten extra years of payments. However, you might consider 40 year mortgages for bad credit because lenders will sometimes approve these loans with a lower credit score.

Now that we have looked at the difference in cost between various loan terms, we need to decide whether a fixed rate or adjustable rate mortgage is better.  The answer is, it depends.  When mortgage rates are low, it is better to get a fixed rate mortgage because there is nowhere for rates to go but up.  As mortgage rates rise, so will your monthly payment.

When mortgage rates are high, an adjustable rate mortgage is often a good idea for the homeowner.  However, in today's economic climate, these mortgages are only a good deal for the banks.  It is better to pay a slightly higher interest rate and lock it in for the life of the mortgage than to enjoy a few years of lower rates now in exchange for skyrocketing rates a few years down the road.

For most home buyers, the 30 year fixed rate mortgage offers the perfect balance between payment amount and purchase power.  However, there is no such thing as a one-size-fits all mortgage.  There are cases where other types of mortgages provide a better solution for the home buyer.  You should evaluate all of your options carefully before making a mortgage decision.