And the winner is: The 30-year fixed loan! If there were a popularity contest for mortgages, the 30-year fixed would win, hands down. Historically, the 30-year fixed loan is the mortgage industry’s most popular type of loan; if your parents or your grandparents had a loan, chances are, it was a 30-year fixed loan.
So what is a 30-year fixed loan? Well, just like it sounds, it’s a loan that has a repayment term of 30 years – that is, your payments will be spread out equally over three decades – at an interest rate that’s set – or “locked in” – when the loan is taken out. Over the years, more loan products entered the marketplace, but the 30-year fixed rate mortgage is still popular for several reasons:
- There are no surprises: Because the interest rate is fixed, your payments over the life of the loan – in this case, 30 years or 360 months – will always be the same. That makes it easy to plan when it comes time to do your budget; you know exactly how much you’re going to have to pay this month, next month, and every month until the loan is paid.
- Inflation can be your friend: Even if the value of a dollar decreases over the life of your loan, the amount you pay is not adjusted for inflation. For instance, suppose you bought a loaf of bread in 1970. According to the USDA, that loaf would have cost about 28 cents. Fast-forward to 1990 and that same loaf would have cost about 70 cents. Similarly, if your loan payment was $280 in 1970, inflation would mean it would cost about $700 for the same mortgage in 1990. But since your rate is locked in, you’d still only be paying $280.
- It’s flexible: As your salary goes up you always have the option of paying your loan off early, which means big savings in interest.
Of course, that doesn’t mean this type of loan is without its disadvantages; the two biggest?
- If interest rates decrease, as they have in recent years, you could be paying more now for a mortgage you took out 10 years ago than you would for a loan you took out last year.
- Because payments are drawn out over such a long period, the total amount of interest you’ll pay is often much more than the total interest of a loan with a shorter term.
Just because the 30-year fixed loan has been the most popular, that doesn’t mean it’s the best product for you (in fact, one of the reasons it’s been the most popular is because for many years, it was pretty much the only product out there). There are more mortgage options today than ever before; take a close look at your finances to figure out which loan type makes the most sense for you.
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