The 30-Year Mortgage - Pros and Cons
Spread the Cost of Borrowing and Make Lower Mortgage Repayments
Jun 1, 2009
The 30-year mortgage has traditionally been the loan of choice for U.S. homeowners. Spreading the cost of borrowing over a longer term means lower mortgage repayments. In these difficult times, this leaves more money available for other essential household bills.
Advantages of the 30-Year Mortgage
- Lower mortgage repayments. A $400,000 30-year mortgage at 4.625% would result in a mortgage payment of $2,056 per month. A 15-year mortgage at 4.375% would cost $3,034 per month. This leaves an extra $978 for other essential household bills.
- Capital repayments. Should a homeowner receive a windfall payment, such as a bonus or inheritance, this can be used to reduce the outstanding capital.
- Capital investment. Homeowners may find that the money saved on a 30-year mortgage can be invested to achieve a better return. It also means that extra money is available in the event of financial difficulties following ill health or unemployment.
- Better than renting. Monthly mortgage repayments may not be affordable with a 15-year mortgage. Whilst the interest paid on a 30-year mortgage is higher, buying a house is better than renting.
Disadvantages of the 30-Year Mortgage
- More interest paid. A 30-year mortgage means that 180 months of additional monthly mortgage repayments will need to be made. The cost of borrowing increases as the additional interest paid is $194,000 when compared to a 15-year mortgage.
- Outright ownership. The majority of each monthly payment goes towards clearing the interest. This means that outright property ownership is delayed by many years.
- Negative equity. Extending the mortgage term leaves a homeowner vulnerable to negative equity when property prices fall. Less equity is available to provide a cushion should this happen.
- Less flexibility. Making a lower mortgage repayment is helpful, but it leaves a homeowner with less scope for change in the event of financial hardship. Those that start off with a 15-year mortgage may be able to switch to a 30-year mortgage further down-the-line.
Whilst the 30-year mortgage allows a homeowner to spread the cost of borrowing. Although monthly mortgage repayments are reduced, the cumulative interest paid is considerably higher than on a 15-year mortgage. However, it remains the right option for those that lack sufficient disposable income.
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Disclaimer: This article in no way attempts to give legal or tax advice. One should consult a licensed attorney, tax advisor, or other qualified professional.
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