Normally when we think about home loans the first thing that pops into our heads is the standard 30-year fixed rate mortgage. That is because this type of home loan has basically been the standard since 1954. However, the times have changed and there are more opportunities open to buyers. The reason it became the standard in the first place is dues to the lower payments and fixed interest rates. Since you are paying this loan over the course of 30 years the payments don’t have to be as high plus your interest rate will never change for the lifetime of your loan. This helps avoid the sticker shock of an incredibly high-interest rate since these rates are constantly going up and down.
It is important to understand that a 30 year fixed rate mortgage is not right for everyone and there is really no “one -size-fits-all” mortgage. So here are 5 ways to tell if you and a 30-year mortgage won’t work.
Planning to Move Again in a Year
The whole reason you would get a 30-year fixed rate mortgage is so you could spread your payments out and the amount due would be lower each month. So if you are going to moving in a year there is really no point to this. There are exceptions, but three years is a common rule of thumb for how long you need to own a home in order to recoup your investment by selling it. Some housing experts suggest that five is more accurate minimum. Basically, if you are planning to sell within a year you are probably better off renting instead of buying.
No 20% Down Payment
Getting a 30-year mortgage in most cases will require a 20% down payment. For example, on a $300,000 house, the down payment would be $60,000. So it is understandable if you don’t have that just laying around. If you can’t swing a 20% down payment you may want to look at an adjustable rate mortgage that typically requires a 10% down payment and an FHA home can require as little as 3.5%.
You Need Cash Flow
If you do have enough for a 20% down payment, but you don’t want to put all your eggs in one basket. You may want to avoid a 30-year mortgage and consider a 10% down payment with an adjustable rate mortgage instead. An interest-only ARM is a great way to increase cash flow however, it is only available to people with great credit scores.
Building Home Equity Quickly
A 30-year amortization period is the most common type of fixed-rate loan, but many home buyers also choose to get a 15-year loan. This is because a shorter loan length will allow you to build equity faster. Keep in mind that your monthly mortgage payments will be higher with a shorter loan term.
Depending on your life plans, gaining more equity in a shorter time period might make a 15-year fixed-rate loan a better option for you than a 30-year loan. Plus, 15-year fixed-rate loans offer lower interest rates than 30-year loans, meaning you will save money over the life of the mortgage.
Planning to Retire Soon
Being debt-free in retirement is a priority for many baby boomers. If your golden years are in sight, taking out a 30-year mortgage on a home now might not sync well with your retirement plans. A three or five-year ARM might make more sense, especially if you are planning to sell the property within 5 years and live as a renter in retirement.
