Thirty year fixed rate mortgages are one of the most popular financing options for homes. There are advantages and disadvantages to a thirty year fixed rate loan. Before deciding if a 30 year fixed rate mortgage is right for you, it is important to understand the pros and cons and carefully evaluate your current financial situation.
When purchasing a home, there are a variety of financing options. Over the past several years, many people have decided to finance their homes with adjustable rate, interest only loans. When they did this, their monthly payment was low, because they were only paying the interest amount. The principal of the loan was never reduced. At the end of the interest only term, the buyer had two choices. He or she could refinance again or pay off the principal in one lump sum. Clearly, most people opted for refinancing.
This choice worked well as long as home values were strong, because the value of the home increased over time. When housing prices dropped however, many people found that they owed much more money on their homes than they were worth. This prevented them from obtaining financing.
With a 30 year fixed rate mortgage, this scenario can never happen. The loan is arranged so that each monthly payment goes toward the interest and the principal. Over the years, the principal, or the actual amount owed on the home, is reduced.
Once the 30 year fixed rate loan is closed, there is no reason to revisit it unless the borrower wishes to. If interest rates drop, the borrower may wish to refinance, either to lower his or her monthly payment or shorten the term of the loan. If, however, the bottom has dropped out of housing prices so dramatically that there is not sufficient equity in the home, the borrower is not forced into foreclosure, he or she simply continues to pay the existing mortgage.
The current housing market makes today a good time to purchase a home. Housing prices are low and lenders are eager to loan money to qualified applicants. If your credit history is strong and you have stable employment, there has not been any time in recent history that is more attractive for homebuyers.
It is important that we learn from the mistakes of the past however. While some lenders may still offer interest only loans, a 30 year fixed rate loan offers stability and peace of mind. With the fixed interest rate, you know exactly how much your payment will be from now until the end of your loan term. The only thing that will change the payment is if you initiate a refinancing. If, during the refinancing process, you believe that the new loan will not provide the same benefits as the existing loan, you are not required to close.
Many people shy away from a fixed rate loan because the alternative, an adjustable rate loan, appears more attractive. But it is important to realize that the initial rate can be increased just as easily as it can be decreased. As of August 2009, interest rates were very low and affordable. Locking in a fixed rate loan at one of these low rates will save money over the life of the loan. If you choose an adjustable rate, you may save money over the first six months to year of the loan, however, as the economy picks up, interest rates will increase and you will miss the opportunity to lock in the lower interest rate.
If you are still unsure about the benefits of a fixed rate mortgage, ask your lender what their policy is on locking in an interest rate, and converting from an adjustable rate to a fixed rate mortgage. Some lenders allow this throughout the life of the loan, while others will require you to refinance the loan and go through another closing with another set of closing costs. If your lender is operates this way, it is important to weigh the benefits and drawbacks of an adjustable rate versus a fixed rate loan.
If you do decide to close on an adjustable rate loan, be vigilant about watching interest rates. While rates swing on a daily basis, a continued upward track should be a warning sign that it is time to convert your adjustable rate to a fixed rate mortgage. If not, your payment may increase by hundreds of dollars when the lender makes their interest rate adjustment.
Thirty year fixed mortgage rates can sometimes be more expensive than adjustable rates, but they provide stability and predictability. And they give you the opportunity to plan for the future. For many modern homeowners, this peace of mind is a worthy investment.
Lucinda Jones is a freelance writer who writes about the mortgage industry, often focusing on a specific topic such as
mortgage rates.
