The 30 year mortgage rate continues to be at historic lows. The benefit of getting a lower rate is that borrowers can afford more home. Over the last many years, rates have remained low which has allowed home buyers to increase the average size of the house they buy. Starter homes or first time home buyer homes have seen one of the most significant increases in average purchase price because of the low interest rate environment. Additionally, low interest rates often allow homeowners to pay their mortgage off faster. It’s not uncommon for a homeowner to pay extra each month because the low rate will enable them to budget to do so.
Borrowers often choose the amortization of a loan based on their household plan. The 30 year loan stretches the payments out longer, thus allowing the borrower to have a lower payment. Typically this is done to either allow someone to afford more home or allow them to free up money to go to other debts. Since the time frame is longer, the borrower will pay more in interest over the life of the loan. According to Freddie Mac the majority or borrowers choose the 30 year mortgage over other mortgage products. The 15 year mortgage is a shorter amortization and typically has a little bit lower interest rate. A person will pay much less in interest over the life of the loan on the 15 year mortgage versus the 30 year mortgage, but their payment will be significantly higher due to the shorter term.
People often think that when they get a 30 year mortgage, they will be required to put 20% down. While this may be optimal, it is not required. Borrowers can get 30 year loans with little to no money down depending on the loan product. With that said, anytime a borrower does not put 20% down, it is considered riskier for the lender so some form of mortgage insurance is usually required. With conventional loans, mortgage insurance is paid to private companies; however with the government-backed loans, it is paid to the government agency which backs the loan.
Borrowers can choose to refinance or purchase with a 30 year mortgage. For a home purchase, the required down payment is determined by the particular by the loan product. If it is a government-backed loan such as FHA, 3.5% down payment will be needed and for the USDA loan does not require a down payment. Most conventional loans require a min of 5% down. If a borrower is refinancing a home, the loan amount is determined by the appraised value.
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