What Is a 30-Year Fixed-Rate Mortgage?

Jul 17, 2022 | Mortgage Guides

Understanding Stability: The Basics of a 30-Year Fixed-Rate Mortgage

Many home financing options are available for first-time homebuyers – home loans or mortgages are the more popular methods. From the various types of loans offered in the primary mortgage market, most people choose a 30-year fixed mortgage due to its predictability. This way, borrowers can factor in their monthly payments with certainty, whereas other options may not provide the same assurance.

‍In this guide, we’ll discuss 30-year fixed mortgages in depth. We’ll explain what they are, explore the pros and cons, and answer questions that future borrowers may have. We’ll also share tips on how to get the best 30-year mortgage rates and provide insight into what to prepare when applying for one! These services are aimed at helping you make an informed decision with all factors considered. Keep reading to find the best 30-year fixed mortgage for your budget.

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Understanding Fixed Mortgages 

Fixed-rate mortgages are a loan type that features a fixed interest rate and APR. Once you’ve qualified at a specific interest rate, it will be locked at that level until you’ve paid the loan off. That is one of the defining pros of the system.

‍Due to its simplicity and range of term choices, fixed-rate loans are the most popular for first-time homeowners. These loans are helpful for long-term budgeting. Most of each monthly payment pays off the loan’s interest first. Once it does, the bulk pays the loan principal. This aspect is a crucial consideration for many borrowers.

‍In contrast to an adjustable-rate mortgage, fixed-rate mortgages are amortizing. That means once the loan ends, you have paid off all the principal and interest you owe to the lender. Unlike an ARM, a 30-year fixed-rate mortgage won’t experience negative amortization where interest outweighs the payment – causing the loan balance to increase. This factors heavily into why many borrowers prefer this option.

‍Fixed mortgages are offered in varying lengths. While 15-year and 20-year loans are available, the most common term is 30-year. Because the latter offers the longest terms and the lowest monthly installment amounts, many borrowers find this route more accessible.

Strengths of a 30-Year Fixed-Rate Mortgage 

In this section, we’ll discuss the top three reasons why a 30-year fixed loan is the most popular for American homebuyers, discussing the pros and addressing any lingering questions the borrowers might have.

Affordable Monthly Payments

The main benefit of fixed mortgages is that the amount stays the same until you pay the loan off. That is beneficial if you have a limited income because it makes room for a safety net. Despite the lower monthly payments, you can pay more than the minimum. It’s worth noting that this is optional but can fast-track your way to clearing the loan.

Stable Mortgage Rate

The stability of 30-year fixed mortgage rates is one of its biggest appeals, especially if you need to map out your housing expenses. Stable interest rates also mean that if you lock your 30-year loan in during a period of low mortgage rates – right now, for example, due to the coronavirus pandemic driving down mortgage rates – you’ll have that interest rate and APR for the life of the loan. Such stability in rates is indeed a pro appreciated by most borrowers.

Potential to Qualify for a Larger Loan

Even if you need a larger loan to buy a more expensive home, a 30-year mortgage may still grant you affordable monthly payments that are unavailable with a 15-year loan. You can even opt for jumbo loans that exceed limits set on conforming loans by guarantor companies Fannie Mae and Freddie Mac. However, these loans feature higher mortgage rates compared to conforming loans. It goes without saying that such financial decisions must consider many factors.

Shortcomings of a 30-Year Fixed-Rate Mortgage 

While a 30-year mortgage offers many benefits, there are also caveats to remember. It’s crucial to weigh the pros and cons before making a decision.

Lenders Charge Higher Rates

Mortgage lenders take a greater risk and tie up their money longer when taking out a 30-year loan. Hence, they impose higher mortgage rates, which is a con that potential borrowers should be aware of before opting for such services.

As an illustration, expect to receive a 2.322% interest rate on a 15-year loan, while a similar 30-year mortgage will have a 2.852% interest rate. Choosing a mortgage will bring a recurring cost to your budget, so you must plan accordingly. It’s essential to understand that the mortgage payment schedule can substantially impact both the total cost of your house and the timing of your repayments.

‍Because 30-year mortgage rates are locked in for the entire life of the loan, lower mortgage rates are unobtainable unless you refinance. That is where the borrowing products offered by different lenders come into play.‍

Pay More Interest

Compared to a 15-year fixed loan, you will double the interest in a 30-year loan because you have twice the principal and interest. While you may save money in the short term, you’ll pay more in the long run. That’s why prospective home buyers must consider the total cost of the purchase in the long haul.

Home Equity Builds Slower

As you make mortgage payments, you build equity in your home. Equity represents the part of your home you own, free of debt. A reasonable repayment schedule will ensure a steady build-up of this equity.

‍Because early payments in fixed mortgages pay off your interest, your home equity will be slower to build. However, you can counteract this by paying more than the minimum amount on your monthly installments, which will reduce your borrowing proportion. While you may not have money to do this every month, it builds your equity faster.

Preparing Your Fixed-Rate Mortgage Application 

30-year loans are riskier to lenders, who will want you to prove that you won’t default. To help convince them, lenders will examine four of the following aspects.

Credit Score

One determinant of a borrower’s risk is their credit score. This score ranges between 300 to 850 and reflects your creditworthiness. A higher score will look more favorable to potential lenders because it indicates that you have a strong repayment history.

‍Your credit score is directly linked to the mortgage and annual percentage rates (APR) you receive from lenders. A better score signals better rates and plays a significant role in the cost of your mortgage.‍

Debt-To-Income Ratio

A debt-to-income ratio (DTI) represents the amount of debt versus your overall income. Most lenders prefer to see DTI no greater than 36%. To optimize this for your mortgage purchase, you can reduce your recurring debt and increase your income.

Employment History

Another factor that may determine your loan eligibility is your employment history. Lenders like to see a stable record. Hence, provide your pay stubs to prove your work history and to assure them of your ability to keep up with the mortgage payment schedule.

Statement of Monthly Income

Pay stubs from your work also satisfy another requirement from lenders – proof of income. In addition to proving that the prospective borrower has steady wages, these statements also serve as proof that you can cover the payments.

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Is a 30-Year Fixed-Rate Mortgage Appropriate For You? 

One advantage of a 30-year fixed-rate loan is its stability. It is best if you plan on staying in the same house and wish to pay lower monthly installments.

‍If you can make higher monthly payments, you may benefit by taking out a 15-year fixed-rate loan. That can reduce the long-term cost of your house and can be a smart move for buyers with higher income brackets.

‍However, fixed-rate mortgages aren’t recommended if you plan to sell your house within the next few years. An adjustable-rate mortgage offers better potential in such circumstances.‍

Calculating Your 30-Year Fixed Mortgage Rates 

Consult with one of our representatives today to better understand the products offered by various lenders and the most current mortgage and refinance rates. A primary mortgage market survey of America’s major lenders will be updated daily. Note that these rates are subject to change without prior notice.

‍Use our mortgage calculator tool for a custom estimate of your 30-year fixed mortgage. With just a bit of information about your finances, we’ll provide a personalized mortgage estimate to aid your purchase decision. Once you know your home loan amount, use a mortgage calculator to assess the monthly installments.

Why You Should Consider Refinancing 

Because 30-year fixed mortgages have a static interest rate & APR, refinancing can prove instrumental in reducing your rates and, ultimately, your taxes. A mortgage refinance entails taking out a new loan at a lower rate to pay off your current home loan. Like your initial mortgage, you’ll need to re-qualify for a refinance from mortgage lenders. During this process, keeping your financial needs and goals at the forefront is critical, considering factors such as how the refinance could impact your credit cards and savings.

‍Still, lower rates don’t always guarantee that your refinance will help. Pay attention to other costs, such as closing costs and additional fees. Most refinances also require a 0.5% fee for all loans over $125,000. Keep in mind the significance of managing your mortgage payments amidst these fees.

‍If you refinance a 30-year fixed loan, get a shorter loan to save on interest costs. However, ensure you don’t have lofty monthly installments‍ that disrupt your financial stability.

How To Find The Most Affordable 30-Year Fixed Mortgage Rate

A lower thirty-year fixed mortgage rate boosts your savings on your loan. We share four tips below to help you find the best rates and best-valued mortgage that aligns with your needs and goals.

Shop Around For Loan Offers

Like any product, lenders in the primary mortgage market compete for a borrower’s business by offering better rates. You may find a lender that offers a better rate than your bank. To compare offers, lenders must provide standardized documents containing the interest rates and APR on their mortgage loans.

Consider Other Mortgage Loan Options

While fixed mortgages are standard for buying a new home, they aren’t the only loan type offered on the primary mortgage market. Examine your financial situation, credit card commitments, and future plans to determine whether fixed loans are appropriate.

‍In addition to conventional loans from mortgage lenders, consider government-backed programs like an FHA loan or a VA loan. These loans offer affordable alternatives for home buying, but they may have some caveats. For instance, an FHA loan requires you to take mortgage insurance, and VA loans require you to be a service member and pay a funding fee that replaces mortgage insurance.

Pay More Down Payment

Another method is to pay more than the minimum down payment. Thus, you’ll have a lower loan-to-value ratio. Paying more down also avoids extra costs associated with mortgage insurance, freeing up more room for savings.

‍An added benefit is avoiding jumbo loans by paying a larger down payment to conform to loan limits set by Fannie Mae and Freddie Mac. That can especially be beneficial if you have other financial responsibilities like credit card payments or taxes.

Work With Mortgage Brokers

By enlisting the help of a mortgage broker, you’ll leverage their experience and connections to find better mortgage options that align with your financial needs and goals. In addition to helping you find loans with a better mortgage rate, they may also reduce or even waive closing costs associated with your loan.

Closing Thoughts 

Because of their stability and low monthly installments, 30-year fixed mortgages are popular with first-time homeowners. Thanks to the extended payment period, they also allow you to qualify for a larger home that you couldn’t afford with shorter-term loans. Still, these benefits are balanced out by the high-interest payments and slower build of home equity.

‍If you’re a first-time homebuyer who wants to find the perfect home loan, Wesley Mortgage is here to help! Our team of financial professionals can advise you on how to find the best-valued 30-year fixed mortgage that suits your budget and meets your savings goals. Contact us today for more information!

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