Most people choose 30-year mortgage loans1 because the monthly payment on these loans can be less than a typical rent payment, making homeownership more affordable in some cases. These longer-term mortgages are also attractive because they have a fixed interest rate that does not change.
A 30-year mortgage will have a lower monthly payment than shorter terms, but you will likely pay more in interest over time. That's why CUTX recommends that borrowers with a 30-year loan pay extra on principal whenever possible. You can also talk to a tax professional about deducting the interest paid on your mortgage each year.
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The biggest advantage of a 30-year mortgage is the monthly payment. Many people find that the monthly payment on a 30-year mortgage is about the same as monthly payment for a rental. But with renting, when you leave a property, the money you paid is just gone, whereas with home ownership, you have equity and often make a profit from your investment.
Even if your mortgage loan is amortized over a 30-year term, you are allowed to pay extra toward your balance or even pay off the entire balance early without incurring any fees. So, if you have more money next year and want to start putting an extra $50, $100, or even more toward your principal, you can accelerate paying off the loan and save thousands in interest. With a 30-year loan, paying more is an option, not a requirement.
These mortgages are not the best investment for someone who isn’t sure they will want to be in the house for several years. Most of the mortgage payment at the beginning is interest. It takes longer to build equity with a 30-year mortgage. So, if you will need to sell the house in a year or two, you might not even recoup some of the costs of having bought it.
Many experts estimate that, with a 30-year mortgage, you will have to own a home for at least five years, to break even on the cost of purchasing it. That’s why a 30-year mortgage is best for those planning to stay in the home awhile. You can speed up the process by paying extra on the principal every month. By paying an extra $100 a month toward principal on a $200,000 house at 4.5% interest, you can save more than $30,000 and cut the length of the mortgage by five years.
You can use a loan amortization calculator to see how much equity you will have after each year. For example, if you owed $200,000 on your house in 2019 at 4.5% interest, then by 2029 you would only owe a little more than $155,000, meaning you had about $50,000 in equity. So, if your housing market remains steady or improves, and your home is in good condition, you may walk away with at least $50,000.
It’s a good idea to start by getting pre-approved, so that you know what price level of home you can qualify for. Simply contact one of our mortgage specialists and we can walk you through the whole process, or click here to apply online.
1. NMLS #576560 Credit Union of Texas provides mortgage loans through its affiliate Texas Mortgage Lending, LLC, NMLS #1641703. CUTX home loan programs are only available in Texas. Loans are subject to credit approval, CUTX's lending policies, and property approval. 2. ARM loans are variable rate loans; interest rates and payments may increase after closing.
