Looking to buy a house? Congratulation! If you are not buying it with cash, you are probably looking for a mortgage and the best rate possible.
If so, the most popular option is the 30-year fixed-rate mortgage. It is the choice of a majority of the people in the United States. But is it really the best bet? Thirty-year is a very long time, and you need to make sure you make the best decision for the next thirty years of your life.
So, what exactly is a 30-year fixed-rate mortgage, and why would you want it? Are the insurmountable risks of a 30-year fixed-rate mortgage worth the potential added benefits? Let' s take a clear, concise look at this popular home loan option.
What is a 30-year Fixed Mortgage?
A 30-year fixed mortgage, as the name suggests, is a home loan that gives you 30 years to pay back the money you borrowed at a fixed interest rate. Sounds simple? There is a bit more about it, though.
The 30-year fixed-rate mortgage might seem better with the cheaper monthly payment. However, your lender will charge a higher interest rate on your loan in exchange. So, even when you pay less per month with a 30-year term, you will be saddled with a higher interest rate. Do you know what does it mean? It means you will fill the whole of interest with a lot of your money.
Average 30-year Fixed Mortgage Interest Rate in 2022
Lenders make attractive offers to let you borrow their money so they can make a chunk of money in return for what they loan you in interest rate. With a 30-year mortgage, your lender gets to collect 30 years' worth of interest if you keep your loan for that long.
Today, rates are at the highest level in the entire history of fixed-rate mortgages going to 4.88% from 3.12% in 2021. The rate was at 3.74% in January 2022. Although the Fed keeps a close eye on the Treasury rate, which serves as the base for mortgage rates, there is less chance of any drop until the following year.
It is essential to mention that rates can vary slightly among lenders, but the rate you will receive depends on several factors. The most well-known factor determining your mortgage' s interest rate is your credit score, which is very much in your control.
When to Consider a 30-year Fixed Mortgage?
A 30-year fixed-rate mortgage is best for those who look for predictable interest rates and low monthly payments. Since the repayment timeline is longer, the monthly costs are usually low. With this, the more expensive loans will ultimately be easier on your budget.
However, if you have some cash in hand, it is wise to go for a 15-year or 20-year mortgage. In a 30-year mortgage, you will wind up paying more interest over the life. The monthly payments may be low, but your interest rate will be high.
30-Year Fixed Rate Mortgage Pros & Cons
How to tell if the 30-year fixed mortgage is right for you? It by comparing the pros and cons.
- Low Monthly Payment: One main advantage of repaying a mortgage over 30 years is the lower, more affordable payments spread out over time.
- Predictability: With a consistent principal and interest payment, you can better map out your housing expenses for the long term. It is only possible when you have a fixed-rate mortgage.
- Buy More House: With lower payments, you can qualify for an immense loan amount and may be able to afford a more expensive home.
- More Wiggle Room: If you have low monthly payments, you can create more cushions in your budget for other goals like saving for an emergency fund, retirement fund, and college tuition.
- Tax Deduction for Mortgage Interest: Current tax laws allow homeowners to deduct mortgage interest from their taxable income. Consult a tax expert about whether your deduction will make itemizing worthwhile or not.
- Higher Interest Rate: One of the most significant disadvantages of a 30-year fixed mortgage is the high-interest rate. If you take 30 years mortgage, you will pay more in interest than you would with a short-term loan.
- High Mortgage Rates: Lender generally charge higher interest rates for 30-year loans because they are taking on the risk of not being repaid for a more extended period.
- Becoming House Poor: If you can afford more houses with a 30-year loan, it does not mean you should overstretch your budget. Give some breathing room for other financial goals and unexpected expenses.
- Slower Equity Growth: It generally takes longer to build equity in your home because your initial mortgage payments go toward interest rather than paying down your principal amount.
- More Expensive House: As the applicants can qualify based on their ability to make payments, a 30 year fixed rate loan allows you to pursue a more expensive house.
How to Qualify?
To qualify for a 30-year fixed mortgage, you will need:
- 1. A minimum of 3% down payment
- 2. A minimum FICO score of 620
- 3. Your debt-to-income (DTI) ratio of no more than 50%
- 4. Cash to cover closing costs (usually 2-6% of the purchase price)
It is advisable to have professional help while applying for a 30-year mortgage to ensure a smooth process without getting trapped and complicating things for yourself.
What is the Best Lender to Get a Smart Affordable Mortgage?
To give you the best option, we have compared popular mortgages on market with their rates and advantages. One lender that we can recommend to you safely is Rocket Mortgage.
Rocket Mortgage used to be the online loan shopping and application process offered by Quicken Loans. It make complicated home financing simpler and quicker with the help of technology and innovation. Secondly, they offer win-win rates for both borrowers and lenders. With Rocket Mortgage, you can save thousands of dollars, paving a smoother path to your financial goals. Lastly, it is America's largest mortgage lender, with a competent team to help you achieve your dream of homeownership.