Is a 30-Year Fixed Rate Mortgage for You?

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With interest rates going up and buyers wondering if they should still look to purchase a home, many ask us (and their lenders) what type of loan they should get. The 30-year fixed rate mortgage has been the “gold standard” for American home buyers since 1954. But is that the right type of loan for you? It depends.

A 30-year fixed rate mortgage gives a buyer stability. Your monthly payment will be lower and your principal and interest will be the same over the 30 year period. But this realtor.com article gives 5 signs that a 30-year fixed rate mortgage may not be the best option for you right now.

1. You plan on moving in a year.
If this is the case, it may be best to rent or look at another financing option. Rule of thumb is to stay in your home for at least 3-5 years after purchasing.

2. You do not have 20% to put down on a home.
In most cases, getting a 30-year mortgage requires that you put down 20%. However, there is a way for some to get a 30-year fixed rate mortgage, but it will most likely require that you pay PMI (private mortgage insurance). If you only have 10% or less to put down, an adjustable rate mortgage or an FHA loan may be the way to go.

3. You need cash flow now.
If you do have 20% to put down, but you really need the cash or you need to put that extra cash into your retirement, an adjustable rate mortgage (ARM) may be the way to go. You do have to have excellent credit to get an ARM, but it will free up some cash.

4. You want to build home equity quickly.
A home buyer can build equity faster with a 15-year fixed rate mortgage. The monthly payment will be higher, but the interest rate will be lower and will allow you to build equity much faster.

5. You’re planning to retire soon.
Being debt-free in retirement is a priority for most. Taking out a 30-year loan may not be the best plan to help reach this goal. Many will choose a 3-5 year ARM, since they may sell within a few years and live as a renter in retirement.