The 30 year fixed rate mortgage is one of the most common mortgages. It is a long terms investment, and like the 15 year mortgage there are some explicit benefits and disadvantages.
The benefits:
1. Smaller Payments. Ok this is a rather obvious benefit. If you have a $200,000 loan and are paying it off in twice the time, you will be paying much less each month. I think this is a great advantage for people with incomes that aren’t as steady (like people that live on comission or are self employed). It makes it so you don’t have to dedicate as much toward a house payment each month, and can be a sort of financial security if you lose a job.
2. Liquid assets. If you are nearing retirement, or just need to be able to tap into your wealth, its a good idea to keep some of your investments liquid. A liquid asset would be sometihng like a bond or CD. They typically have a certain amout of maturity time, but with bonds you can cash them out and just lose part of the interest as a penalty. They say you shouldn’t put all your eggs in one basket, so spreading out your investments can actually help you out if the housing market declines again.
3. You can buy a bigger/better home and still be able to make the payment. I don’t advocate buying ore home than you need, but if you have a larger family and need a bigger home, a 30 year mortgage will probably be what you should choose. I wouldn’t try to squeeze 4 kids and a dog into a 2 (or maybe even 3) bedroom home if you can get a home that will fit your family better. Of course, getting a 4 bedroom home for a family of three is a bit excessive and would not be a good reason to get a longer term mortgage.
The disadvantages:
1. It will take you a long time to gain equity. The first few years your payments will be 80% toward interest. If you plan on moving soon, you will not have as much equity to put toward your next home purchase. Extra payments are needed if you expect yo gain equity more quickly.
2. You pay more in interest. Interest rates tend to be a little higher for the 30 year loan, than shorter term loans. If you get a mortgage for $150,000 at 6% interest you will pay over $90,000 more in interest over the life of the loan. You can of course pay extra decreasing the term of your loan.
3. The interest you pay is tax deductible. This is great for people that already itemize because its can mean additional tax savings especially in the first few years of the mortgage. For many people the itemized deduction may only save them a few thousand dollars more than a standard deduction. In our situation (because we are barely middle class and have a child) we would not get a tax break at all from itemizing.
The lowdown:
I think 30 year mortgages are great. Many first time home owners might not even qualify for other loans, but do qualify for the 30 year mortgage. In our case, the 30 year mortgage means that if we lose our current employment we can still may house payments on the ‘crappy’ jobs. You know, fast food or retail clerk or anything else thats right around minimum wage. We won’t have any extra income, but its possible to keep our home and not fall behind in any bills.
Also, by paying extra we can save ourselves interest and still have the income to invest in long term savings or even the ability to have a several hundred dollar cushion built into our budget.
The Finance Fiend 