With rates falling to near historic lows, there’s nothing more popular than a 30-year mortgage right now in the United States. However, just like all things, 30-year mortgages come with both pros and cons.
Pros of a 30-year mortgage
- The thing that people love most about 30-year mortgages is that they come with relatively low monthly payments.
- Thanks to the lower payments, the borrower also has the possibility to buy more house, much more than they would be able to afford with a 15-year loan.
- Another good thing about the lower monthly payments is that they allow the borrower to save money or use the extra cash for other goals. And you win even more if you put the extra money to good use.
- Smart investors can also use the extra money to invest in higher-yielding securities. Such an investment will make money if the returns after taxes are higher than the cost of the mortgage less the interest deduction.
Cons of a 30-year mortgage
- The biggest drawback of a 30-year mortgage is that it’s far more expensive than a 15-year mortgage. The explanation is simple. You are borrowing money for twice as long and, because the cost of a mortgage is calculated as an annual interest rate, you will pay twice as much for a 30-year loan than for a 15-year loan.
- Long-term loans present a higher risk for banks and are more expensive to fund. As a result, the mortgage for a 30-year loan comes with a higher interest rate.
- You may also need to pay more in fees if a government-sponsored company, such as Fannie Mae, buys your mortgage. These government-backed enterprise charge fees called loan level price adjustments. They apply to borrowers with lower credit scores and smaller down payments.
All types of mortgages come with pros and cons. What’s important is that you have numerous options to choose from. If you do your homework, you can pick out the best mortgage for you.