4 Things to Know About 30 Year Fixed Rate Mortgage
30 Year Fixed Rate Mortgage is the most popular mortgage in USA, said Freddie Mac®. So, if you are planning to get a mortgage loan, I won’t be surprised if you settle for the 30 Year Fixed Rate Mortgage. But before you choose that option, it will be a good idea for you to find out those things that are peculiar to the mortgage. The truth is that, not everybody that gets 30 Year Fixed Rate Mortgage actually knows much about this particular type of mortgage loan term.
I remember a particular time in my career that I changed my job into a multinational company. The company is very big with many departments and units. As part of my orientation, I needed to go through all the company’s departments to understand their systems and processes. Actually, I respected the company for the type of control systems it had in place. There were good segregation of duties and the company’s processes and procedures were well documented. But the only thing I didn’t like about that type of system is that, it didn’t allow initiatives on the part of staff. I asked some of the staff some salient questions as why they did things in the ways they were being done in their departments. To my dismay, they couldn’t give me any genuine reason. Some of them said, “That was how things are done here but I don’t know why it is like that”. Is it not amazing? But that is what some Americans do too when choosing 30 Year Fixed Rate Mortgage. Just because it is very popular, they think that they can’t do otherwise.
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That is not my nature. If I am to do something, I want to know why I should do it. Another good example was when they asked me to join the cooperative society established by the staff of the company. My first question was, “Is it compulsory that I must join?” And the answered was in the negative. My second question was, “Why do you think I should join”. They said that all staff are members of the cooperative society. Of course, that is not the type of answer I was expecting. I wanted them to give me a reason that is more personalized. After much probing questions, they finally hit the nail on the head. They said that if I joined, I would have access to credit facility. Also, I would earn interest on my contributions. Immediately I told them that there was no reason for me to join. One, I don’t like borrowing. That had been my lifestyles and I had been able to build sufficient cash in my emergency funds and retirement account. Besides, I would earn higher returns on my money if I invested it myself. I was not just trying to be different. But I was not afraid to be different since I had good reasons for my action.
So, before you jump into any particular mortgage type or term, you should ask yourself some salient questions. For instance, you should be able to ask yourself; “Why 30 Year Fixed Rate Mortgage? That is why I will like to discuss some peculiarities of 30 Year Fixed Rate Mortgage below:
Features of 30 Year Fixed Rate Mortgage
Some of the features of 30 Year Fixed Rate Mortgage are already embedded in its name. Notwithstanding, I will still like to discuss them.
Tenure: If your home loan is 30 Year Fixed Rate Mortgage, it means that you have up to thirty years to finish paying the mortgage loan, both the principal and the interest thereon. However, you should understand that it is not compulsory that you need to wait for the whole thirty years before you pay off the mortgage. You can shorten the life span of the mortgage either by way of refinancing the loan or making extra/bulk payment. If you make extra monthly payment or bulk payment, this will be used to reduce the principal that is still outstanding on the mortgage. This will automatically shorten the term of the mortgage. 30 Year Fixed Rate Mortgage allows extra payment without any penalty for early repayment. Depending on the age at which you took the 30 Year Fixed Rate Mortgage, if you limit your payment to the regular monthly repayment amount, you may find yourself still struggling to pay for your mortgage at your very old age. For instance, if you borrow 30 Year Fixed Rate Mortgage when you are 35 years old, you will still be paying for the mortgage when you are above 60 years old.
Fixed Interest: The interest rate you start with at the closing of the mortgage loan is what you will pay all through its tenure. The interest rate does not change as in the case of Adjustable Rate Mortgage (ARM). The rate is fixed regardless of any fluctuation in the market interest rate. This feature can be an advantage and a disadvantage depending on the trend of the interest rate. If the interest rate increases, this will not affect you as you would have already locked in the interest rate in the 30 Year Fixed Rate Mortgage. But if the market rate should fall, you may end up paying higher interest rate than the market rate. The only thing you can do in this situation is to refinance the mortgage loan. But you will need to take the cost of refinancing into consideration.
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Predictability: Homebuyers are able to predict their cash flows because the amount they pay every month remains the same over the entire life of the mortgage. Your monthly mortgage payment at the beginning of the mortgage will be what you will pay till the end of the loan. However, you are at the liberty to make extra payment. This is good for good budgeting as you already know the amount to pay at the end of every month. There is no unpleasant surprise.
Prepayment: I have already discussed this but it is actually a feature that home buyers can take advantage of. It means that if you receive gifts, bonus or tax refunds, you can actually use the money to pay part of your mortgage. This will help you reduce the interest you would have paid on the mortgage if you allow it to last for the entire thirty years. It will also help you to build equity on your home quickly.