When purchasing a home, there are many important decisions to consider, especially decisions about the terms of your mortgage loan. One decision you must make is your loan’s duration. There are a variety of options available, from 3 and 5 year mortgages to 10 and 20 year mortgages, but typically you will have to decide between a 15-year mortgage and a 30-year mortgage. Both options have a variety of both perks and drawbacks, so decide based on your personal needs and financial situation. Learn more about 15-year mortgages.
What is a 30-year mortgage?
A 30-year mortgage is one of the more common loan options offered by mortgage lenders. Its most defining characteristic is its 30-year duration, which is the period of time during which you are expected to pay back the loan. Because the life of the loan is 30-years and your loan’s amount will be spread over this period, monthly payments are fairly low, as compared to those of a 15-year mortgage. In addition to having relatively low monthly payments, 30-year mortgages also tend to have high interest rates, making them less popular than 15-year mortgages.
When might a 30-year mortgage be better than other terms?
A 30-year mortgage is the best option for those who plan for the long-term. Although this may be obvious, given the loan’s 30-year duration, there are a variety of reasons that make a 30-year mortgage the best option for long-term planners:
Save Money Month-to-Month
One of the benefits of having a low monthly payment is that it allows you to save money month-to-month and thus better manage your finances. You can save money for the long-term, either by making investments or just keeping money in a savings account. You can spend money on other things such as utilities, student loans, or even groceries. Although you’ll be paying more in the end, you can always use a 30-year mortgage to balance your monthly budget, before refinancing to a shorter-term loan (say 10 or 15 years) to pay back the loan faster.
Buy a More Expensive Home
Since you’ll have more time to pay off a 30-year mortgage, consider taking out a larger loan on a better home. By purchasing a better home, you can easily build equity and maximize your investment. With extra equity on an already higher-value property, you may be able to sell your home for equal or more than you bought it for. Additionally, if the home is big enough, you may be able to earn extra income by renting portions of your home out, either through traditional renting or one of the many share-economy platforms available.
Have Flexibility in Payments
With a 30-year mortgage, you have a greater degree of flexibility in your monthly payments than you can with a shorter-term mortgage. Because the lower payments associated with a 30-year mortgage give you a little extra spending money, you have the option of using that extra money on a larger mortgage payment, or even a payment towards principal. Having the ability to increase and re-lower your mortgage payments is a huge perk of having a 30-year mortgage.