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There are a lot of factors to consider when you are looking for a new mortgage.
One of the biggest decisions you need to make is the term of the mortgage, or how long you want to make payments for.
The most popular mortgage term length is the 30 year mortgage.
This type of loan allows you to spread your payments out over a longer period of time, which can be helpful if you are on a tight monthly budget.
However, there are also some drawbacks to this option that you should be aware of before you make a decision.
In this blog post, I discuss the pros and cons of a 30 year mortgage so that you can make an informed decision about what is best for your needs.
Table of Contents
11 Pros And Cons Of A 30 Year Mortgage
Pros Of A 30 Year Mortgage
There are a lot of advantages of a 30 year mortgage.
Here are the biggest ones to consider.
#1. Lower Monthly Payment
The biggest benefit of a 30 year mortgage is the smaller monthly payment.
This can be helpful if you are on a tight budget, or if you want to free up more cash each month to save or invest.
By spreading the payback period to 30 years, you effectively have lower payments each month than if you took out a shorter term loan.
This alone is the biggest reason why so many home buyers go with this longer term loan.
It allows them to fit the lower payment amount into their budget.
#2. Buy A Bigger House
When you take out a 30-year loan and have a lower monthly mortgage payment, you can afford to buy a bigger house.
For example, let’s say you determine you can comfortably pay $1,400 a month on your mortgage.
If you take out a 15-year loan at 3.5%, the largest loan amount you could get with that monthly payment is roughly $200,000.
But choose a 30-year term mortgage instead and you can get a home loan for roughly $315,000.
With the increase in housing prices, this opens the door to many more potential homes.
Of course the issue here is you will need to put down a larger down payment in order to avoid private mortgage insurance.
Otherwise, you will see a small increase in your monthly payment amount.
With that said, you aren’t required to put more money down.
You can still make a low down payment, you will just have a slightly higher mortgage payment.
#4. Fund Other Financial Goals
Related to the idea of smaller payments, having less money going towards your monthly payment compared to a 15-year term loan allows you to fund other financial goals.
This could mean putting away more each month towards your retirement.
Or it could mean building up your emergency fund or saving for a vacation.
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This is an important thing to think about as the last thing you want is to be what is known as house rich, cash poor.
Having all your wealth tied up in your house is a recipe for disaster.
Here is another benefit of a 30 year mortgage that not many people talk about.
You have the flexibility to pay your loan back based on a 30 year term, a 20 year term, a 15 year term, or other shorter-term loans.
What I mean by this is you can do the basic math and figure out what it will take to pay off your 30 year mortgage 10 years early assuming you want to be mortgage free in 20 years.
For example, maybe you looked at a 20-year loan but the higher monthly payment was too much money.
You take out a 30 year mortgage and a couple years later, after promotions at work, you realize you have the ability now to make larger payments.
So you do the math to determine the amount of your extra payments that will go towards the principal balance to have the loan paid off in 20 years.
If you go with a shorter loan term, you don’t have the option to pay it as if it were a 20 or 30 year mortgage.
You can only pay it off at 15 years or less.
The added benefit here too is depending on your finances, you can pay extra one month and not the next month.
So if something happens, you have the flexibility to pay extra or not.
This is why biweekly payments have become so popular.
#6. Low Interest Debt
Finally, mortgage debt is low interest debt in that it tends to have a lower interest rate than credit cards and other types of debt.
Plus you can deduct the interest you pay on your taxes, effectively lowering the interest rate you pay even further.
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Because of this, many financial experts say it makes sense to take out a 30 year loan and pay it off based on the terms.
Then take any extra money you might consider putting towards the mortgage as extra principal payments and invest it in a higher yielding investment like the stock market.
For example, let’s say you were thinking of putting an extra $250 a month towards your mortgage.
- Read now: Here is how to invest $250 a month
If you decide to put the money in the stock market and it earns 6% annually for 20 years, you have roughly $117,000.
If you still have a balance on your home loan, you could put all this money towards it.
Or you could start using this money to make the monthly payment.
You could even just this money for other purposes not related to your mortgage.
Cons Of A 30 Year Mortgage
As great as the benefits of a 30 year mortgage are, there are also drawbacks.
Here are the biggest drawbacks you need to consider.
#1. Longer Payoff Period
When you take out a 30 year mortgage, you have a monthly bill for a lot longer than if you took out a shorter-term mortgage.
This can interfere with other financial goals you have in life.
For example, let’s say you move for a job at age 45 and take out a 30 year loan.
If you don’t make any additional principal payments, you will still be paying the loan well into your 70s.
If you plan to retire at 65, this means you have a large monthly bill for the first 10 years of retirement.
In other words, you will need more money to survive during retirement.
#2. Pay More Interest
Arguably the biggest drawback of a 30 year mortgage is the interest you pay.
Let’s look at an example to drive this point home.
With a $200,000 loan at 3.5% for 15 years, you pay $57,357 in interest.
A 30 year loan for the same amount and interest rate, you pay $123,312 in total interest costs.
You would pay $66,000 less interest by going with a loan with a shorter term.
Think about all the things you could do with that amount of money.
When you extend the amount of time for your mortgage, you pay a lot more in interest payments over the life of the loan.
The tradeoff is that you also get a lower mortgage payment.
#3. Higher Interest Rate
A long term loan carries more risk for the bank.
As a result, the interest rates you pay on these loans tend to be more than for shorter term loans.
So not only do you pay more interest because of the longer payback period, but also more interest from the higher interest rate.
Let’s take the previous example again.
With a $200,000 loan for 15 years at 3.5% you pay $57,357 in interest.
On a $200,000 loan for 30 years, your interest rate will be 4.25%.
You end up paying $154,197 in interest payments or $96,840 more.
#4. Risk Of Overborrowing
One of the benefits of this type of loan is you can afford to buy a more expensive house since you spread your payments out over a longer period of time.
But the risk with this is overborrowing.
If you buy too big of a house, you could set yourself up for a serious amount of financial pain in the future.
For example, let’s say you lose your job.
With a bigger mortgage, you might experience a lot more stress during this time.
Another potential issue is because you have a low monthly payment, it is easier to look at pricier homes and try to compete with others to appear successful.
Even though you can afford the payments based on your monthly income, the opportunity cost is tremendous.
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#5. Longer To Build Equity
Finally, it takes a lot longer to build equity with a 30 year loan.
Since you pay mostly interest in the beginning years of the loan, you don’t build up a lot of equity.
So if 5 years in you decide to sell, you might only have a few thousand dollars of equity built up, assuming you didn’t put down a large down payment.
This is why many people recommend not buying a house you don’t plan on staying in for at least 5 years.
There are 10 pros and cons of a 30 year mortgage.
While it is a great tool to help you realize the dream of home ownership, it isn’t perfect and not right for everyone.
Make sure you not only consider all the factors listed here, but also the advantages and drawbacks of a 15 year loan too.
Then you can make the best decision for your financial situation and goals.