A 30 Year Fixed Rate Mortgage - What is it?

By Eddie V. — Published May 10, 2018

A 30 Year Fixed Rate Mortgage - What is it?

If you have decided to buy a home, no doubt, the thoughts in your mind will be circling on how you could possibly finance the purchase. In most cases, buying a good home requires an upfront payment of a huge sum that you probably don't have readily available.

This is the reason why more than fifty percent of buyers take out a mortgage when purchasing a home. Reports have shown that nearly forty-nine percent of homes that cost north of a million dollars are purchased by taking out a mortgage.

A mortgage is nothing but a loan offered by a lending agency to help an individual purchase a property. The property serves as the collateral and is repossessed in the event of a failure to pay back the loan.

Nearly 80 percent of the costs of buying a home is financed through mortgages. One of the first things to understand before taking out a mortgage is its structure, payment schedule, and interest rates.

Typically, a mortgage is paid back through monthly payments. The mortgage amount is referred to as the principal.

A monthly mortgage payment is the sum of the principal amount, the interest, and additional costs like taxes, insurance, and escrow.

Mortgage payments are calculated on the basis of a periodic payment schedule known as an amortization schedule. An amortization schedule reduces the balance of the mortgage by accounting for the periodic payments made towards the repayment of the loan.

The longer the payment period, the lower the monthly payments.

What is a 30-year fixed rate mortgage?

If you plan on buying a decent home, but cannot afford to make heavy monthly payments, then, long-term loans are the way to go. The most popular home loan is a 30-year fixed rate mortgage.

As the name suggests, a 30-year fixed rate mortgage is a long-term loan that needs to be paid off in 30 years. In addition, it is a fixed rate mortgage which means that the interest rate stays the same throughout the payment period.

What are the pros and cons of such a mortgage?

It is a relatively safe way to purchase a home and involves very less risk.

One of the greatest advantages of a 30-year fixed rate mortgage is that since the monthly payments are so low, buyers can afford to purchase better homes.

One disadvantage is that a long-term fixed rate loan is much more expensive than a short-term loan. In short-term loans, although the monthly payments are high, the interest rates and other additional costs are much lower than that incurred in a long-term loan.

With long-term loans, you end up paying much more than you borrowed in the first place.

A 30-year fixed rate loan can be paid off before the loan period ends. There is no rule that says you must stretch out your payments over the course of 30 years.

During the initial period of the payment, you will notice that most of your payments go into paying off the interest. As the loan term nears to an end, you will be paying very less towards interest and most of your payments would go towards paying off the principal.

The 30-year fixed rate mortgage is best when you are planning to purchase a quality home with the intention of staying for a very long time. In cases where buyers do not intend to stay at their home for very long periods, it is wiser to take an adjustable-rate mortgage or ARM. in such a mortgage, the interest rates vary according to different factors and the monthly payments on the mortgage vary according to the rise or fall in interest rates.

Related Articles