MORTGAGE MATTERS

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Jan 2018

Pros and Cons of a 30-Year Fixed Rate Mortgage

When you’re ready to buy a home, the loan options and terms can make the process seem complicated. How long will your loan term be? Do you want a fixed-rate mortgage loan or an adjustable-rate mortgage loan?

Your mortgage lender will explain your loan terms and options to you, and help you choose the mortgage option that best fits your financial needs.

Loan term options

Your loan term is the life of your loan, or the set amount of time in which you’ll pay back your loan. A few common loan term options are a 30-year loan, a 20-year loan, and a 15-year loan. For example, with a 30-year loan, if you make your payments on time, you will have paid back the full loan amount, plus interest, in 30 years. Once your loan term is set, you’ll get an amortization schedule from your mortgage lender. An amortization schedule is a table that shows the progress of how you’ll pay off your mortgage loan. The table breaks down how much of your monthly payments go toward your principal and interest, how much is due, and when it’s due.

Fixed-rate vs. adjustable rate loans

There are two options for interest rates on your home loan: a fixed-rate mortgage or an adjustable-rate mortgage (ARM). Some loan options are only available as fixed-rate loans, so talk with your lender about what is right for you.

With a fixed-rate mortgage loan, the interest rate you start with will remain the same throughout the life of your loan, unless you refinance your loan down the road.

This means that your monthly mortgage payment will always be the same, unless there are price changes to taxes and insurance. On the other hand, an ARM’s interest rate will fluctuate throughout the life of your loan. Most ARMs have a fixed initial interest rate period for a specified amount of time at the beginning of your loan term, during which the interest rate remains the same. After the fixed initial interest rate period, the interest rate changes. For example, a common ARM structure is the 5/1 ARM, where the fixed initial interest rate period is 5 years. After that, the interest rate changes annually. One of the most popular loan options is a 30-year fixed-rate mortgage loan. This means that you’ll pay back the loan over 30 years, and your interest rate will remain the same throughout the life of your loan. But why would you choose a 30-year loan term when you could choose 15? What are the benefits to a fixed-rate mortgage loan? Let’s talk about the pros and cons of this popular loan.

30-year fixed-rate loan: pros

A more affordable payment

When you compare the monthly payment on a 30-year fixed-rate mortgage loan to a shorter term mortgage, like a 15-year term mortgage, the payments are often smaller and more affordable. The fixed-rate means your interest rate won’t change throughout the life of your loan. But with an adjustable-rate mortgage loan, your rate can change, and could increase your monthly payment. Let’s look at this in an example on a $200,000 home loan. For a 30-year fixed-rate mortgage with an interest rate of 4%, your monthly mortgage payment would be around $955. For a 15-year fixed rate mortgage on the same house, with the same interest rate, you’d be paying an estimated $1,479 a month. Now let’s change up the interest rate options. For the same $200,000 loan, with a 30-year term and adjustable-rate, your initial payment might be $955 a month. If you had a 5/1 ARM, you’d pay $955 a month for the first 5 years of your loan. After that, your interest rate would change every year. Let’s say the first year it changes, your rate increases to 5%. That makes your new estimated monthly payment $1,057. If the next year it increased to 6%, your payment would be $1,162.

Flexibility and predictability

With a 30-year fixed-rate mortgage loan, you have the flexibility to pay off your loan faster if you’re able to. But how? Since this type of loan offers you a low monthly payment option, you may actually be financially able to pay a little more than what you owe each month. Maybe you’re able to pay more in September and October, but can only afford your normal payment in November and December. You can do that. Just be cautious if your loan has prepayment penalties, which may penalize you if you pay over a certain amount of your loan balance in one year. A 30-year fixed-rate loan is predictable, and gives you the “sleep well advantage.” Knowing your payment will remain consistent makes things a little less stressful, and makes it easier to make other financial plans. With this loan, you know that your monthly payment will always be $X. So no matter what happens to interest rates and the housing market, your mortgage loan payment will remain the same. Your payment amount will stay constant. This way, you can do some financial planning to fund other things, like college tuition, buying a new car, or taking a vacation. Your monthly payment can change if your premiums change for your taxes or insurance.

30-year-fixed-rate loan: cons

You pay more interest

Your interest rates on a 30-year fixed-rate loan will be higher, even though it will stay the same throughout the life of the loan. When you get a 30-year fixed-rate loan, your mortgage lender’s risk of not getting paid back is spread over a longer period of time. For this reason, lenders charge higher interest rates on loans with longer terms. This may seem obvious, but it’s also something to consider: when you choose a 30-year mortgage loan term, you will pay more interest than if you were to choose a shorter loan term. It’s that simple. Yes, a 30-year fixed-rate loan may offer you the lowest monthly payment, but that’s because you’re choosing to pay your loan amount back over the longest amount of time. As long as you owe money back to your lender for your loan, you’ll owe interest, meaning you’ll pay more total interest on a 30-year fixed-rate loan than you will on a 20- or 15-year fixed-rate loan. As previously before, you pay back your loan on an amortization schedule, which breaks down what you have to pay and when you owe it. Your lender will provide you that schedule. It also breaks down how much of each of your payments will go toward your principal balance and how much will go toward your interest.

Try using an amortization calculator, which you can find online. When you plug in some information about your loan (or the loan you want), it will show you exactly how much interest you will pay based on your loan’s term.

It might not be the right loan for you

A 30-year fixed-rate loan might not match up with your other life goals. Maybe you’d like the end of your loan term and your retirement to coincide. This might mean you want a 20-year loan term, not 30. Is your goal to have the house paid off before (or close to) sending your child off to college? These are important things to consider when you choose a loan term. When deciding what loan terms and options are right for you, think about how much of a monthly payment you you’re comfortable with. Also consider what current interest rates are like, and the length of the loan term you want. Your mortgage will be able to guide you through the process, and explain the different options available for your financial situation. A 30-year fixed-rate mortgage loan might be the right loan option to get you into the home of your dreams.

Frequently Asked Questions

Chances are, if you're wondering about it, someone else has too. Here are answers to some of the questions we hear most often.

What are the main advantages of a 30-year fixed-rate mortgage?
The two most significant advantages are lower monthly payments compared to shorter loan terms and payment stability over the life of the loan. Because you are spreading repayment over 30 years, your required monthly payment is lower than it would be on a 15- or 20-year loan at the same interest rate. And because the rate is fixed, your principal and interest payment will never change, regardless of what happens to market interest rates. This predictability makes it easier to budget for other financial goals and is one reason the 30-year fixed-rate mortgage remains one of the most popular loan options among homebuyers in Virginia, North Carolina, Florida, and Georgia.
What are the disadvantages of a 30-year fixed-rate mortgage?
The primary disadvantage is total interest cost. Because you are borrowing money for a longer period of time, you will pay more interest over the life of the loan than you would on a shorter-term mortgage at a comparable rate. Interest rates on 30-year loans are also generally slightly higher than on 15-year loans, which compounds the difference. Additionally, you build equity more slowly in the early years of a 30-year loan because a larger portion of each payment goes toward interest rather than principal. If paying off your home sooner or minimizing total interest paid is a priority, a shorter loan term may be worth comparing.
Is a 30-year mortgage better than a 15-year mortgage?
It depends on your financial situation and goals. A 15-year mortgage typically comes with a lower interest rate and much less total interest paid over the life of the loan, but the monthly payment is significantly higher. A 30-year mortgage offers a lower required monthly payment, giving you more flexibility in your monthly budget, but costs more in total interest over time. Many borrowers choose the 30-year term for the lower payment and then make additional principal payments when their budget allows. A mortgage banker can run a side-by-side comparison for your specific loan amount and rate so you can see exactly what each option costs in your situation.
Can I pay off a 30-year mortgage early?
Yes, in most cases. One of the benefits of a 30-year fixed-rate loan is that it typically gives you flexibility to pay more than the minimum required payment when your budget allows. Paying extra toward your principal each month can shorten your loan term and reduce the total interest you pay. Before making additional payments, it is worth confirming with your lender whether your loan has any prepayment penalties, which can limit how much extra you can pay in a given year without a fee. Most conventional loans today do not carry prepayment penalties, but it is a good idea to verify with your mortgage banker.
How does a fixed-rate mortgage differ from an adjustable-rate mortgage?
With a fixed-rate mortgage, your interest rate is set at the time of closing and remains the same for the entire loan term, regardless of changes in the broader interest rate market. This means your principal and interest payment stays constant. With an adjustable-rate mortgage, or ARM, the rate is typically fixed for an initial period, often five, seven, or ten years, and then adjusts periodically based on a market index. A common structure is the 5/1 ARM, where the rate is fixed for five years and then adjusts once per year. ARMs can offer a lower initial rate but introduce payment uncertainty over time. The right choice depends on how long you plan to stay in the home and your comfort with potential payment changes.
What credit score do I need for a 30-year fixed-rate mortgage?
Minimum credit score requirements vary by loan program. For a conventional 30-year fixed-rate loan, most lenders look for a credit score of at least 620, though a higher score typically results in a better interest rate. FHA loans, which are also available as 30-year fixed-rate loans, may be accessible with credit scores as low as 580 with a 3.5% down payment, depending on the lender. VA loans and USDA loans also offer 30-year fixed-rate options with their own eligibility requirements. Your specific credit profile, debt-to-income ratio, and down payment amount all play a role in determining the rate and terms you may qualify for. Speaking with an Atlantic Bay mortgage banker is the best way to understand your options based on your current financial picture.
How much does a 30-year fixed-rate mortgage cost per month?
Your monthly payment depends on the loan amount, interest rate, and whether your payment includes escrow for taxes and insurance. As a general reference, a $300,000 loan at a 7% interest rate on a 30-year fixed-rate mortgage would result in a principal and interest payment of approximately $1,996 per month, not including taxes, homeowners insurance, or mortgage insurance if applicable. Because current market rates differ significantly from those of several years ago, any payment examples in our articles should be viewed as illustrations rather than current benchmarks. Your mortgage banker can provide a current loan estimate based on today's rates and your specific loan amount.
Who is a 30-year fixed-rate mortgage best suited for?
A 30-year fixed-rate mortgage is generally well-suited for borrowers who value payment stability and want to keep their required monthly payment as low as possible. It is a strong option for first-time homebuyers who are managing other financial priorities such as building an emergency fund, paying down other debt, or saving for near-term expenses. It also works well for borrowers who plan to stay in their home long-term and want certainty about their payment over time. Borrowers who prioritize paying off their home quickly or minimizing total interest cost may find a 15- or 20-year loan term worth comparing. A mortgage banker can help you model both scenarios based on your income, goals, and the markets you are shopping in, including active markets across Virginia, North Carolina, Florida, and Georgia.

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The views and statements expressed are deemed reliable as of the publish date indicated and may not be accurate or reliable at any future date. The views and statements provided are those of the author. Discussions regarding any financial information provided are not intended as individual recommendations and do not reflect the views or advice of Atlantic Bay Mortgage Group, L.L.C. The views expressed are subject to change at any time in response to changing circumstances in the market. *For refinances, the total finance charges may be higher over the life of the loan. Atlantic Bay Mortgage Group, L.L.C. disclaims any obligation to publicly update or revise any views expressed or information given. Loan programs may change at any time with or without notice. Information deemed reliable but not guaranteed. All loans subject to income verification, credit approval and property appraisal. Not a commitment to lend. Atlantic Bay Mortgage Group, L.L.C. NMLS #72043 (nmlsconsumeraccess.org) is an Equal Housing Lender. Located at 600 Lynnhaven Parkway Suite 100 Virginia Beach, VA 23452.