Is a 30-year Fixed-rate Mortgage Practical?

Arguably, no mortgage is more prevalent in Connecticut than 30-year fixed-rate home loans. Despite not having the lowest mortgage rates in Guilford, Cheshire, Beacon Falls, and Seymour, this program attracts most Connecticuters because of its predictability. The fact that your monthly mortgage payments will not change throughout the term of the loan is good enough to make up for its higher price.

The security 30-year fixed-rate mortgages bring to the table explain their ubiquity in the country. While it is wise to take out a loan with a cost that does not fluctuate, it is a mistake to consider it practical. Here are the reasons why:

You Would Not Keep More Cash in Your Pocket

As mentioned, a fixed-rate mortgage comes with interest higher than its adjustable-rate counterpart. Its interest might not increase by several percentage points due to unfavorable economic conditions, but it will never go below the market either.

Sure, inflation can make your fixed-rate mortgage payments cheaper over time. If the rate of your increase income is higher than the devaluation of the greenback throughout the term of your loan, then you can end up saving money.

A fixed-rate mortgage is just a means to an end. But if you are going to use it for buying a bigger house, you are likely to inflate your overall cost of homeownership.

Your total interest depends on the size of your principal, so the ongoing expenses of servicing a more substantial debt can eat into your monthly budget more significantly. Also, a bigger property is more costly to maintain and insure.

You Would Not Hold on to It Until Its Maturity

handing over a house model

A recent industry report revealed that homeowners in the United States stay in their properties just for an average of 8.09 years as of Q2 2019. The number increased 3% from the same period the year prior, which means Americans are becoming less mobile.

Nevertheless, staying in a house for a little over eight years does not justify taking out a 30-year loan. Although you do not have to pay the interest for the remainder of your loan’s term when you decide to pay it off early, your annual percentage rate (APR) goes up if your mortgage does not reach maturity.

An advertised APR is calculated based on the assumption that the loan will be repaid entirely at the end of its term. If you shorten the repayment period, your mortgage’s APR will increase because the closing costs have to be divided by fewer months.

You Would Not Own Much of Your Home

In a 30-year fixed-rate mortgage amortization calendar, most of your overall payment during the first half of your loan’s term is applied to the interest. It is structured this way, so the owner of your loan gets paid more quickly and absorb less risk if you stop repayment in the future.

In other words, your early regular payments will not reduce your principal as fast as you might believe. Therefore, it is hard to build equity on your property, which represents the real percentage of your ownership of your house.

Each home loan has pros and cons, but the dark side of a 30-year fixed-rate mortgage does not get discussed as frequently. If this loan fits your needs, understand both its positives and negatives to keep it from working against you.

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