In the world of home financing, the 30 year fixed rate mortgage is probably the most common loan product in the United States. But did you know that wasn’t always the case? It wasn’t until after the Great Depression that 30 year mortgages became standard. Before the early 1930s, most mortgages were short term, usually five to seven years, and required a balloon payment at the end of the term. In order to stimulate the housing market and boost the nation’s economy, the FHA helped create the 15 and 30 year FRM to make home ownership more affordable for Americans. Today, the 30 year FRM remains the most common mortgage product. The many benefits associated with the 30 year FRM are what helped it sustain its popularity.
Take a look at the following advantages of the 30 year fixed rate mortgage and see if it makes sense for your home financing needs:
1. A longer term means more affordable payments.
Since your loan will be fully amortized over a period of 30 years, your monthly payments are likely to be much more affordable under a 30 year FRM. For example, if you need to finance $200,000 through a 5 year loan at an interest rate of 4.5%, your monthly payment would be roughly $3,728.60 (presuming the interest rate is fixed). If you take the same figures and apply them to a 30 year FRM, the monthly payments would only be $1,013.37.
Naturally, because you are spreading your payments out over a longer period of time, it will take a lot longer to pay off your mortgage; however, most Americans do not realistically expect to pay off their home loans – at least not for their first home purchase. Instead, they usually sell or refinance to make up the difference still owed on the home. For those who do have the goal of owning a home outright, a 30 year FRM is still a good option, as most allow extra payments toward principal. So, if you have the ability to pay more each month or if you can make a few extra payments a year, you can save yourself a bundle on interest and still pay the loan off sooner.
Use this handy online mortgage payment calculator to get an idea of how much you’ll pay each month with different loans.
2. Your interest rate will never change.
The interest rate on a FRM is permanently “fixed” for the entire term of the loan. This provides stability and predictability when it comes to your monthly payments, allowing home owners to budget easily. Unlike adjustable rate mortgages (ARMs), where the interest rate can fluctuate up or down, fixed rate mortgages stay the same. The only downside to this is when borrowers lock in what they think is a great low rate, only to see rates drop significantly a few years later. That’s why a lot of 30 year FRM borrowers end up refinancing after a few years.
If you’re considering a 30 year fixed rate mortgage, the best time to get one is right before interest rates start moving up. Naturally, there’s no real way to know for sure when this is going to happen, but if you pay attention to economic news and keep an eye out for what mortgage rates different banks are advertising, you will begin to get a sense of where the tide is moving.
Right now is a great time to lock in a rate for a 30 year FRM, as rates have been slowly but surely moving up. Again, it’s never a certainty, but experts say it is unlikely that rates will get lower any time soon.
“In general, we wouldn’t expect even the most flawless loan files to be seeing high 3% rates without origination/discount points up front.”
- Matthew Graham, Mortgage News Daily
3. A good choice when interest rates are low.
Fixed rate mortgages are popular anyway, but they become even more popular when interest rates are low, because borrowers want to lock in a low rate while they can. That way, if rates go back up in five years, they’ll have the satisfaction of knowing that they’re payments will stay the same. Of course, the actual rates will depend on the national prime rate, economic factors and whether or not you pay points (money paid to lower the interest rate). Alternatively, when interest rates begin to rise (and they have in recent months), shorter term mortgages like the 20 or 15 year FRMs become more popular. This is because the shorter term mortgage products generally have lower interest rates.
At the time of this writing, American Financial Resources offered a 30 year FRM rate of 4.000% (zero points) and 3.875% (o.36 points). The rates for a 15 year FRM was 3.125% (zero points) and 3.000% (0.17 points).
Please note, interest rates change daily – sometimes more than once per day – so be sure to contact American Financial Resources for a personalized quote.