30-year FRM: 30-Year Fixed Rate Mortgages Explained
What is a 30-Year Fixed Rate Mortgage?
Prior to the Great Depression, mortgages were short-term loans that ended in a giant balloon payment. You either refinanced in about five years or you coughed up enough dough to cover the note. During the Great Depression, you couldn’t do either, so suddenly a lot of houses were in foreclosure. A great deal of the lending community went under because of lack of insurance protection, and there was no one left to buy all those houses.
Fast forward to 1934, when the Federal Housing Administration said enough was enough and created an early version of today’s mortgage insurance, as well as amortizing loans that stretched from 15 to 30 years in term. These changes, considered givens today, jump-started the ailing real estate market again. The fact that FHA allowed borrowers to only provide a 10 to 20 percent down payment didn’t hurt anything, either.
The 30-Year Mortgage: Why History Matters
To truly understand the benefits of a 30-year fixed rate mortgage, it’s important to know what came before. When your only option is a short-term loan with no real potential to be completely paid off, being able to spread those payments out over 15 or 30 years and knowing that you’ll own your home at the end is pretty sweet!
So, what’s it mean to have a 30-year mortgage? Simply put, your loan rate, plus the principal and interest payments, are secured for 30 full years. Because your loan amortizes, it will be paid in full on that last payment in year 30. You’ll never have to pay another cent to the mortgage company after that. Your insurance, homeowners’ association fees, and taxes may continue to slowly climb, but those are the only expenses you’ll have to worry about if you never refinance or take out a second mortgage.
Advantages of the 30 Year Fixed Rate Mortgage
- Giving you control over your housing costs. Because your base payment (principal and interest) is guaranteed for 30 years, you’ll never have to worry that you’ll get a surprise in the mail in the form of a demand for much more. This does happen with adjustable rate mortgages under some circumstances.
Allowing you to buy more house now. It’s a rare thing today for a first time homebuyer to have an impressive down payment. That’s no one’s fault, but by utilizing a 30 year fixed rate mortgage for your purchase, you can stretch that house budget pretty far. This way you can get the house you need, and hey, if you want to pay extra, you can. But you don’t have to if your budget can’t bear it.
Providing flexibility in approvals. Mortgage loans are largely approved based on two factors: your credit score and your debt to income ratio. Sadly, it doesn’t matter how good your credit is if your student loan, your car loan, and your emergency credit card are driving your debt-to-income too high to qualify for a short-term mortgage in an amount that’s adequate to pay for your new home. But by using a 30 year fixed rate mortgage, many more buyers can qualify for the home they need, not the one they have to settle for.
Of course, a 30-year mortgage isn’t perfect for everyone, even though it’s a good tool for many buyers. There are additional fixed rate options, including the 15-year mortgage and the 20-year mortgage. There are also adjustable rate mortgages with fixed terms as long as 10-years. Your lender can help you find the right loan for your needs today and tomorrow.