What is a 30-Year Mortgage?
What is a 30-year Fixed Rate Home Loan?
The 30-year mortgage, the steak and potatoes of the home lending world, is the most common type of mortgage you’ll run into as a home buyer. It’s so common that the Consumer Expenditure Survey provided by the Bureau of Labor Statistics determined that between 2004 and 2014, 61.49 percent of all mortgages were 30 year fixed rate mortgages. The second most common type, 15 year fixed rates, only made up 14.64 percent of the market.
Getting to Know the 30 Year Fixed Rate Mortgage
When securing a home with a mortgage, there’s a lot to learn. Luckily, most of the information about 30 year fixed mortgages applies to other kinds of fixed-rate mortgages, too. There are several features of a 30 year fixed rate mortgage that you’ll want to familiarize yourself with. Let’s walk through the basics.
Term and Rate. The “term” of a mortgage is how long you’ll be making payments. This is generally expressed in the number of months instead of years. Your 30-year mortgage, then, has a 360-month term. The rate is the interest rate you’re paying for the money you’ve borrowed. Right now, that’s around 4.5 percent, but it has been both higher and lower in the last 20 years. A fixed rate means that once you’ve locked your loan in -- that is, you’ve found a house and committed to borrowing the money in writing -- it will stay at that rate. Your loan will be 4.5 percent until you pay it off or sell the house.
Full Amortization. To be fully amortized means that your loan will be paid in full at the end of the term. Unlike a balloon mortgage, which has some amount of the balance remaining after the last payment, a fully amortizing 30-year mortgage will have no money left at the end. Often, the last payment is just a little bit smaller than the payments that have come before it.
Mortgage Insurance. Unless you provide a 20 percent down payment at closing, conventional and FHA mortgages will have some kind of mortgage insurance. Conventional loans use Private Mortgage Insurance (PMI), which is typically at a lower rate than FHA’s Mortgage Insurance Premium (MIP). Both are based on the dollar amount of your loan that exceeds 80 percent of the value of your home and drop as your balance drops.
Escrow Accounts. Many 30 year mortgages require that you put money into escrow each month to cover your taxes and insurance premium. These deposits are included in your monthly payment and can influence the amount of money you’re paying with your house payment. Both taxes and insurance tend to increase a little bit each year, which will result in a small increase in the amount you’re sending to the mortgage company.
Programs. Because the 30-year mortgage is so universal, nearly every lender and program has one available. Whether you’re borrowing through USDA, FHA, or getting a conventional loan from the local bank, you’ll have a 30-year option available.
A 30 year fixed rate mortgage can be a great choice, especially if you plan to stay in your home over the long term. You’ll always know what kind of payment to expect and there won’t be any sudden changes as long as you make those payments on time. You may pay a bit more interest over time when compared to a 15-year mortgage, but you’ll be able to buy more house in the here and now. This alone makes the 30-year mortgage a necessity for so many buyers in high-cost areas.