The Pros and Cons of the 30-year Fixed Home Loan


by Jonathan Haeber
jonathan.haeber@californiamortgagerate.com
California Mortgage Rate Columnist

Interest rates are at historic lows. We can thank Alan Greenspan for this, as well as the weak economy. One benefit of having low interest rates is the lower cost of a home mortgage. Locking in the low rate may mean that even if people next to you find a home for less than you did, they might end up paying higher monthly payments.

I was never one for math, but I'll talk numbers: If you had bought a home in 1990, your 30-year fixed rate would stand at 10.1 percent. If you take out a loan today, your 30-year fixed would cost you just about 6 percent.

Monthly Payments for Past and Current Mortgage Rates

Here's the breakdown of monthly payments for a $300,000 home in 1990 and 2005:
  • 30-year fixed @ 10.1 percent (1990): $2,600
  • 30-year fixed @ 6 percent (2005): $1,700

Over the life of the loan, if you had locked in a rate in 1990, your total out-of-pocket costs for the $300,000 home would be $655,767.81. For a $300,000 home in 2005, your total out-of-pocket costs would stand at $347,514.57.

Now you can see the benefits of having historically low rates, but is the 30-year fixed the only way to secure these rates? Not necessarily. There are 15-year, 20-year, even 40-year fixed rates. There are even 5-year interest only loan options, in which you only pay the interest on your mortgage (no principal) for five years at a fixed rate.

The biggest benefit of the 30-year fixed is that, once you have the rate locked, your interest rate will remain the same for 30 years. The disadvantages are that it's more difficult to get approved, banks often require higher down payments, and the interest rate is slightly higher than other loan options.

One thing you should always ask yourself before deciding on a mortgage is how long you plan on staying in your home. If your home is somewhere you want to stay long-term, the 30-year fixed could be your best option. If you're not sure about where you'll be five years down the road, you may want to consider a 5-year fixed home loan.

About the Author

Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages. Needless to say, he's going to refinance for a 30-year fixed as soon as the banks trust him with their money.

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