Owning a home is an awesome feeling, let me tell you! Though we don’t own our home outright yet. Maybe we own a bedroom and a bit of the kitchen? Some grass in the yard? Like most people we had to take out a mortgage loan in order to buy our house. There are many different types of mortgage loans out there these days. We chose a 30-year, fixed rate mortgage.
Here’s what we considered in choosing a 30-year mortgage:
Affordability, low rate, fixed rate, and an option to pre-pay.
Let’s go through them…
Affordability – As much as I’d like to say otherwise, buying a home is expensive for us and finances will be tighter than they’ve been in a long while. A 30-year mortgage allowed the house to be more affordable than if we used a 15-year mortgage. We could be paying less per month with a different kind of mortgage, like a 40-year or adjustable rate, but we liked the stability of the 30-year fixed rate.
Low Rate – Mortgage interest rates are pretty much at historic lows these days. We didn’t get the lowest that rates have been for 30-year mortgages but we got a pretty good one, nonetheless. Like affordability, we could have gotten a lower interest rate with a 15-year fixed rate mortgage or with a variable rate mortgage but those mortgages came with other terms we weren’t prepared to take on.
Fixed Rate – With rates so low we wanted to make sure our rate would be locked in and wouldn’t go up in future years. We fully expect to stay here for a LOOONG time. Way we see it, there’s nowhere for rates to go but up in the long run. We don’t want to wake up one day and realize we have a high rate. The stability of always having the same mortgage payment over the life of the loan also attracted us to a 30-year fixed. Were we staying only five or so years then perhaps we would consider some kind of adjustable rate mortgage to save some on interest payments.
Option to Pre-Pay – We wanted to know that we could pay extra principal if we wanted to. In some other loan types, like adjustable rate mortgages, there can be penalties if you pre-pay. We want to knock out the loan as quick as we are able to while still keeping the mortgage affordable (which eliminates a 15-year fixed mortgage for us). Fact is, we have already started to pay extra toward the principal. Not much but it’s a habit we have already started and we hope to add to the amount when we can.
Basically it came down to us wanting one payment over the life of the loan where we know we could afford it and could pay extra towards it. I think a 30-year fixed rate mortgage fits that for us the best.
My boyfriend (long term, don’t worry everybody) and I have recently purchased an acreage. There’s no house on it yet, so we will also be adding a building loan to it shortly. We have a 30 year loan, no fixed rate, but we have the option to do so at any point.
My favourite thing about our mortgage is the online redraw facility. Any amount extra we put into the loan offsets the interest, and we are also able to redraw any extra funds if we need them. Redrawing has no fees or associated costs. You just have to make sure you have enough in there for the next months payment.
I absolutely loves this, it makes me feel very safe and secure. It’s simple enough to redraw the funds in an instant. But at the same time, seeing the amount of the overall loan go down is enough of an incentive that we haven’t yet been tempted to redraw any of the funds.
So far we have paid off $10,000 more than we need to (and we have only had the mortgage for 2 months). It feels wonderful to know that we have that 10k sitting there, so we can either redraw it should anything terrible happen, or if one of us was to lose our job we already know that we are very far ahead on the loan and don’t actually have to make a payment for quite a while.
We live in Australia, so I’m sure there are some things that are different, but I am very happy with the loan we chose- and of course very happy with the beautiful piece of land we now own.
Sounds like an interesting loan. You have a real incentive to pay more. Can’t say I’ve heard of something like that here in the U.S. but that doesn’t mean it’s not out there.
No house yet, but the 30 year mortgage sounds perfect for you. If you know you’re going to stay for a long time, why put yourself in a position where 15 years might be a squeeze?
Sure it might be nice to pay it off early, but you still can! You have the flexibility of making extra payments toward the principal without the stress that comes with HAVING to!
Exactly! I’d love say we could afford a 15 year loan but right now the 30 is more practical.
We went with a 30-year fixed as well. We didn’t make a solid decision like you did. I bought a house, somewhat blindly. And we let our broker decide our term for us. Obviously, we had to agree and sign all of the paperwork. But to say that I *chose* a 30-year fixed is not 100% the truth.
In the end though, *thankfully* it was a good decision. The fixed rate is low; not as low as today’s rates, but still pretty good. Also, like you mentioned, we have the option of pre-paying without penalties.
Sounds like you were lucky. Glad to hear it’s worked out for you.
In previous years, people were pushed into mortgages that were more beneficial for the bank than they were for the buyer, like interest-only loans.
Yeah, I’m one of the lucky ones, whose broker actually went out and hunted a good rate for us. We locked in at 5.5%, which is pretty good for my (lack of) credit history, even compared to today’s low rates.
There’s an odd thing one needs to understand about mortgages. As rates drop, the ratio of 15 yr to 30 yr payment goes up. e.g. at 4.5%, the 15 yr is a 51% higher payment than the 30 yr payment. At 8% that delta was only 30%.
With today’s rates, I like the 30 as well. Very often, a new homeowner’s next move is a child. Those first years are costly. We went 30 as well, and after our daughter started kindergarten and the cost of a nanny behind us, we refinanced to 20 years, catching a lower rate, and lower payment as well.
That is interesting about the 15 and 30’s.
For us, we already have kids; it’s one of the main reasons we wanted to move. We’re planning on paying more towards principal as time goes on (maybe even put some tax return towards it).
Thanks to refis, I’ve gone from a 30- to 15- and back to a 30-year mortgage over the past 13 years.
What I like most about the 30-year is it provides maximum flexibility: you can still pay extra principal each month as if you had a 15-year mortgage, and in case you lose your job, you have a lower payment that helps you make ends meet easier and stretch your emergency fund savings longer!
Best,
Len
Len Penzo dot Com
The key of course is actually making the extra payment!
I am just in the process of refinancing from a 30 year fixed at 5.75 to 30 year fixed at 4.125%. We thought about going to a 15 year but our payments would still be over 500 higher than what they are now. After refinancing we will be saving over 450/month. We also wanted the lower payment that we know we can definitely afford and then pay extra payments to the principal.
That’s a big difference and a low rate to boot!
No house yet. But when we buy, we are planning to go for 30 yr mortgage and pay it off as if it were 15 yrs. That way, we can pay it off in 15 yrs, but if something happens and we cannot afford the higher payment, we can pay our regular 30 yr amount for those months. I like that flexibility.
It sounds like 30 yr mortgage was perfect for you. Hope when we are ready we will be able to make a good decision.
I’m sure you’ll make the right decision. When the time comes ask questions and do your research. For the most part I think a 30 or 15 year fixed loan is the best bet for most people.
I didn’t realize there could be penalties if you pre-pay on some mortgages. That seems kind of weird, don’t banks want their money back faster?
LOL. I guess not. Banks prefer earning interest off of you instead. If you pre-pay, you take away their chance of making any money off of you.
Also, with a variable rate loan you tend to get a lower rate than a fixed rate loan. The banks want to make sure they re-coup the difference between the two before you start paying back.
I’ve always found interesting how you can get a 30 year fixed mortgage loan. I live in Canada with the longer term for a mortgage is 5 years.
This means that we can have a 20,25,30 or 35 years amortization on our mortgage to decrease or payments but we have to negotiate the rate every 5 years. There are 7 and 10 years but they are really expensive.
How does a 30 yr mortgage translate in term of rate? I wonder how banks can manage to offer a guarantee of 30 years without losing money (especially with rates being so low right now!)
There are government subsidies and many banks give loans only if they know they can flip them to Fannie Mae or Freddie Mac so the loans aren’t theirs anymore.
What are the cost of homes like in Canada? I would imagine if rates are higher then the home prices should be lower.
We did a 30 yr fixed as well….same reasons you did….we have been able to pay extra toward principal as well.
Nice!
You got in at a GREAT time!
We did the same almost 10 years ago. We went with a 30 year fixed mortgage, then for the first year we made double payment each month. We did this because my wife was to become a stay-at-home mom, and we wanted to get a great start on knocking down this debt (and we did)!
The 30 year option was a few hundred dollars cheap cost per month (but almost double the amount of interest that you’ll pay back), but we wanted the extra wiggle room once my wife stopped working at her job.
Later, we refinanced and went with a 15 year loan (mainly because the payments were lower than the 30 year loan at that point). I don’t see the rates dropping for you as they did for me, you are lucky enough to get in near the rock bottom (or so I guess).
I think the 30 year loan is the better option, especially with interest rates so low!!!
You really lucked out! Congratulations on near perfect timing!
Near-perfect is right. Rates continued to drop after we closed. Still, we have a great rate in place for the next 3 decades (hopefully less).
I’m pretty sure that we have a 20 year mortgage, although it may be a 15. We sort of did the opposite of you — we wanted to commit to higher payments so that we would for sure pay it off early. Now though we’re planning to pay it off even earlier, so it probably wouldn’t have mattered what we chose.
If you know you can make the payments on a 15 or 20 then that’s probably a good deal for you.
I have two homes I own, both at 15 yr mortgages. One rate is 5.1% and the other is 4.7%. I will never understand why anyone buys a 30yr mortgage when it means that over 30yrs you will have paid enough in interest to buy two homes! I guess the thinking always goes back to the ‘I can afford the monthly payment’, but after 15 years wouldn’t you want someone paying you $1500 a month, rather than shelling that out for another 15 years?
If people cannot afford the same home in a 15yr mortgage, it really means they can’t afford the home in the first place, and they’re actually overspending.
I appreciate your opinion Patrick. But I think the fact that a 30 year mortgage is so common is one of the reasons homes are expensive in the first place. I would love to have a 15 year mortgage but it’s just not a viable option right now. Truth is, the mortgage part isn’t bad, it’s the taxes that are killer. If 15 year mortgages were the norm rather than 30 year loans then I think homes prices would be lower overall.
Yes, it is crazy the amount of interest one will pay with a 30 year mortgage. That’s why it’s important to have a plan in place to re-pay the principal as soon as possible.
This is a great one. You do read a lot of people advising that 30 year mortgages cost you so much extra money, but the truth of the matter is that inflation eats up a significant portion of that extra cost. As the value of goods and services increases and your mortgage stays the same, the value of your mortgage (not its dollar amount) actually decreases. So while the difference between a 30 year and 15 year mortgage seems like a big deal, the actual difference in values is much, much smaller.
Thank you for sharing!