Why is the 30-year fixed-rate mortgage the go-to mortgage for most people? Affordability and predictability. Payments are made during a longer period of time (as opposed to a 15-year fixed-rate mortgage), so your monthly bill will be lower. Plus, the principal and interest you need to pay each month are fixed, which means you’ll never be surprised when you open your bill.
But for prospective home buyers in today’s market, it’s important to understand that a 30-year fixed-rate mortgage is not always the best option. Many factors come into play when determining what type of loan is right for you, including your credit score, income, down payment amount, and, of course, what size loan you need.
Here, five signs that might lead you to decide that a 30-year fixed-rate mortgage might not be the loan for you:
- You plan on moving again in a year
The entire point of a 30-year fixed-rate mortgage is to spread out your payments over the long haul. 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 a more accurate minimum. If you’re planning to sell within a year, you’re probably better off renting for a year instead of buying.
- You don’t have a 20-percent down payment
In most cases, getting a 30-year fixed-rate mortgage will require you to make a 20-percent down payment. On a $300,000 home, that’s $60,000. So, if you don’t have it handy, a 30-year fixed-rate loan might not be in the cards.
This doesn’t mean that you absolutely have to put 20 percent down to get a 30-year fixed. Getting approved for this type of mortgage will just be more challenging, and you’ll probably have to pay private mortgage insurance (PMI), which is insurance that protects lenders in case you default on the loan. (Historically, buyers with less money invested in a property are more likely to foreclose on a home.) So, if you have only enough for, say, a 10 percent down payment, you might be better off getting an adjustable-rate mortgage, since 10 percent down is the threshold typically required for this loan.
- You need cash flow now
Let’s say you do have enough money to make a 20 percent down payment on a home, but you don’t want to put all of your eggs in one basket. Perhaps you want to put the money into a 401(k). Or maybe you need cash on hand for some other goal, such as starting a business. These might be reasons to avoid the 30-year fixed and its 20-percent down payment and consider putting down 10 percent in an adjustable-rate mortgage instead.
- You want to build 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. Why? A shorter loan length will allow you to build equity faster. Keep in mind, though, that your monthly mortgage payments will be higher with a shorter loan term. Depending on your life plans (for example, if you plan to sell the home in 10 years), 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’ll save money over the life of the mortgage.
- You’re planning to retire soon
Being debt-free in retirement is a priority—or at least a goal—for many baby boomers. Thus, 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’re planning to sell the property within a few years and live as a renter in retirement.