One of the most popular ways to finance a home purchase is with a 30-year fixed-rate mortgage. A 2010 Mortgage Bankers Association survey showed that about 95 percent of mortgage applications were for fixed-rate loans.
Definition of a fixed-rate mortgage
A 30-year fixed-rate mortgage is a home loan in which the interest rate and your monthly payments for principal and interest remain the same for the entire length of the loan. Monthly payments will only adjust if a change is made to your homeowners insurance or property taxes, or both if those items are paid with your mortgage each month.
Borrowers who opt for a 30-year fixed-rate loan will be given a table at their settlement that shows them the payment to be made for each month of their entire loan so that the balance is paid in full by the last payment.
Advantages of a fixed-rate mortgage
The most significant advantage to a 30-year fixed-rate loan is the certainty of the mortgage principal and interest payments, allowing the homeowners to budget more easily. In addition, a term of 30 years will keep the payments lower than a shorter-term loan and therefore more affordable. By using a mortgage calculator, finding out your fixed monthly payment allows you to budget accordingly.
Disadvantages of a fixed-rate mortgage
The main disadvantage of the 30-year fixed-rate loan is that if interest rates decrease, the homeowners cannot take advantage of reduced mortgage rates without refinancing into a new loan, which can be costly.
In addition, a 30-year fixed mortgage will usually have a slightly higher interest rate than loans with a shorter term or an adjustable rate.
During the early years of a 30-year fixed-rate loan, the largest portion of the payment is allocated toward interest. As the loan is repaid, a larger percentage of the payment goes toward principal. In the early years of the mortgage, therefore, the homeowners are not building significant equity in the property.
Fixed-rate mortgage borrowers
Homebuyers who intend to stay in their home for the long term are most likely to prefer a long-term loan, such as a 30-year fixed-rate loan. These loans are even more popular when mortgage rates are low, since homeowners want to lock in a low payment.