30-Year Mortgage Loans - Building Equity with Affordable Payments
Very few can consider buying a home with cash. A house is a long-term investment and housing is a central part of everyone’s budget. The 30-year mortgage loan offers a payment plan to help you purchase a house, make affordable monthly payments and build equity into your home.
Paying off a 30-year loan is a slow process, analogous to the fable of the tortoise and the hare. Slow, steady and perseverance brings you to the finish line. Of course, unlike us the tortoise carries its house everywhere.
Besides the length of the loan, loans differ by:
- The type of interest rate: FRM (Fixed Rate Mortgage) or ARM (Adjustable Rate Mortgage)
- The type of payment schedule: Equal payment loan, interest only or balloon.
The most common type of mortgage loan is the 30-Year FRM. However, there are other types available including a 30 year 7/1 ARM or a 30-Year loan with interest only payments for the first 10 years. In order to help you decide whether a 30-year mortgage loan is best for you learn about:
- Affordability: How much can you afford to buy and pay.
- Payment schedule: Compare a 30-year FRM to a 15- Year FRM.
- Guidelines and steps to obtain a 30-year mortgage loan
30-Year Loan - Affordability but Flexibility
Owning a house brings many benefits, along with responsibilities. You may be considering your first purchase, a refinance, or a trading up (or downsizing) depending on your financial situation and goals. A 30-year mortgage loan helps you slowly build equity in your house and maintain an affordable payment. It also allows you flexibility, because you are obligated to make low monthly payments (compared to a 15-year loan) but can make lump sum prepayments or accelerated monthly payments.
The major reason that borrowers take a 30-year FRM is affordability. The amount of loan you take depends on:
- Your available down payment
- Your monthly income and debt to income ratio
- Your age and financial goals.
Here are some scenarios that make a 30-year loan attractive:
- You are a first time purchaser, generally young and starting to build your financial net worth. Instead of renting, you are looking for a solid investment, whereby you make your money work for you. Your income is stable, and you have built enough equity to begin the purchase. Use the mortgage affordability calculator to help you determine how much big of a loan you can afford to take.
- You are looking to refinance and lower your monthly payments. Your income has dropped and your payments are struggling to make your payments. The longer you are into the loan, the more attractive a 30-year loan looks, because you can then lower your monthly payments, and possibly lower your interest rate.
- You want to buy a splashier house, and are not worried about building equity quickly. A 30 year mortgage is a low risk alternative, although some look for 40 year loans or interest only loans, which carry more risk but have marginally smaller monthly payments.
Payment schedule: Compare a 30-year FRM to a 15- Year FRM
A 30-year FRM is the most common long-term mortgage loan for home purchasers. As discussed above it allows both affordability and flexibility. The chart below shows difference between a 30-year FRM and 15-year FRM.
|30-Year FRM||15-Year FRM||Difference|
|Total Interest (if loan carried to end)||$166,804||$66,200||$100,603|
|Interest if pre-pay loan at end of 7 years||$61,149||$45,885||$15,264|
|Balance at end of 7 years||$213,895||$148,324||$65,571|
The interest rates in the table are for illustrative purposes only.
There is a substantial difference between the payment schedules, as you pay $595 more per month on the 15-year FRM. The 30-year loan will allow you to get your beginning payments manageable and purchase a more expensive house with your down payment. The trade-off of course is the larger financial expense, but that comes at the benefit of holding on to the loan for a longer time.
Guidelines and Steps to Obtain a 30-Year Mortgage Loan
When choosing your mortgage loan terms, plan your budget carefully. Make sure that you are following these guidelines and step:
- Debt to Income: Ideally, your mortgage payment should be around 25% of your gross monthly income. Your total housing payments including mortgage payments, property tax, insurance and HOA fees if applicable should be around 30%. Also, avoid taking on short-term unsecured debt, such as personal loans and credit card debt. Conventional lenders offer best rates at a DTI level of about 36%, including student loan, auto loans and unsecured debt. DTI limits are about 45%
- Savings: Plan (and maintain) your personal budget that includes saving money for a rainy day fund, retirement accounts and investment accounts. Put aside at least 10% of your income towards savings. Avoid taking a short-term mortgage and not saving money. Your home is an important savings vehicle, but it should not be your only one.
- Affordability: Choose a house that fits your budget. Plan to purchase a house that fits your available equity and down payment, stable monthly income and time before retirement. Remember, for many people retirement means a drop in income. Having a house without a mortgage is a big monthly savings. Learn, as many Americans did during the last 5 years, that housing prices do not always go up. Don’t plan selling the property to make a profit. Build a long-term sustainable mortgage plan.
A 30-year loan is the best place to start in planning your mortgage and housing needs. If you can afford more, then consider making prepayments and reducing the time of your loan. Build equity in your house, and don’t keep trading up and taking on larger and larger debt. If you stick to your plan, you will own your house, mortgage free after 30-years (or less) of steady and hard work.