30-Year Home Loans
The 30-year home loan used to be the first choice of most borrowers, since the total payments are spread over a longer period of time with the interest rate set for the entire time of the mortgage. Although the 30-year home loan is the industry standard, is it necessarily the right loan for you?
On one hand, a 30-year home loan will give you lower monthly payments. This attraction is somewhat dimmed by the fact that you will end up paying several times the home's value in interest over the life of the loan. However, your interest is 100% tax deductible, which balances the cost by reducing the amount of your income that the government will tax. In addition, most 30-year fixed-rate loans have no penalty for pre-payments, which means that if you want to pay extra principal, you can actually reduce the amount of interest paid over the life of the loan, not to mention shortening the period in which the loan lasts. Because your payments for the first several years are almost entirely interest, the earlier you can make extra payments, the better off you will be.
Here is an example of the interest difference between 30-year home loan rates and another common home loan, the 15-year loan. On a 30-year mortgage, if you borrow $100,000 at 7% interest rate, your monthly payment of interest and principal would be $665.30 dollars. Over the next 30 years you will pay $210,000 in interest alone. That's almost twice the amount of the actual loan, just for being able to use the bank's money. Now with a 15-year home loan at the same rate on the same amount you will pay $871.11 per month and over the next 15 years, you would pay $105,000 in interest.
If you have the will-power to invest the savings from the monthly payments, you might still be money ahead to go with the 30-year mortgage. If you can find an investment vehicle that will reliably give you returns higher than the money you would have saved by going with the 15-year loan and you can avoid dipping into that money for frivolous purposes, you could end up with a substantial sum of money alongside the equity in your home (or save your bacon if you have a major emergency like a broken sewer line that isn't covered by insurance because it's considered a maintenance item). Another factor to consider is how fast you want to build equity in your home or pay off the loan and own your home free and clear. Because most of each payment at the beginning of a loan goes to interest, it takes a lot longer for a 30-year loan to start building real equity. If you can swing a 15-year loan, you'll start seeing that equity build up much sooner, with the resultant feeling that you're actually getting somewhere.
Most homebuyers prefer the 30-year loan because it allows them to spread the repayment process over more years, resulting in smaller payments. Experts agree that if consumers could get a 35- or 40-year loan, they probably would take it, never mind that it would result in their paying even more interest over the life of the loan. However, that doesn't mean that you should follow the crowd, or that the smallest possible monthly payment is the only consideration in deciding what loan is best for you.
The most important thing you really need to take into consideration is your long-term financial goals. Where do you want to be when you get done paying off that loan? Is it more important to have been able to get the most house you could afford, or to have the most money left over each month for other things, or to pay the least amount of interest? These considerations will help guide you to the loan most advantageous to your personal situation.
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