30 Year Fixed Rate Home Loan
The 30 year fixed rate home loan is probably the most common type of home mortgage loan offered by lenders today. A 30 year fixed rate home loan is popular with both lenders and borrowers because it has stable interest rates and stable periodic payments for the entire term of the loan.
The stability of a 30 year fixed rate home loan is the feature that makes it popular from the borrower’s standpoint. When interest rates in the market constantly change and this causes the home loan payment to change it leaves most consumers hesitant about acquiring a long term commitment such as a home loan. An unwary borrower who gets a fluctuating rate loan at 4% feels pretty good about it until rising interest rates cause the interest payment to be at 5% or 6%. This can add thousands of dollars in interest payments over the course of the loan period, and may make the monthly payments too steep for the borrower, so he ends up losing his home to foreclosure. Especially when interest rates are low, a 30 year fixed rate home loan is very attractive due to its affordability.
There are both advantages and disadvantages to the 30 year fixed rate home loan.
Funds can be borrowed for a long period of time (30 years) without the concern of increasing interest payments. Because the interest and principal are amortized over a longer period of time, the monthly payments are lower, making the loan more affordable to most people.
Conversely, the TOTAL interest cost of the 30 year fixed rate home loan is much larger than over a shorter term loan due to the longer amortization period. Equity builds up very gradually in the home, because early loan payment goes mostly to pay for the interest rather than paying down the principal.
Even the somewhat higher interest rate of the 30 year fixed rate home loan may not forestall borrowers from getting this type of loan, because interest on home loans is deductible on the federal income tax, thus reducing the liability for taxes. This reduction in taxes may even eliminate the potential federal income tax liability.
One other significant advantage to acquiring a 30 year fixed rate home loan is the ability to prepay all or a portion of the principal each month. Because the monthly payment is lower, some borrowers choose to apply the difference between what they would have paid with a fluctuating rate mortgage and the amount they pay with a fixed rate home loan to the principal. Over the life of the loan, this practice of adding perhaps only $50 to $100 monthly to the payment can save literally thousands of dollars in the total cost of the home and shorten the payoff time by several years.
