A 30-year fixed-rate loan is predictable, and gives you the “sleep well advantage.” Knowing your payment will remain consistent makes things a little less stressful, and makes it easier to make other financial plans.
Advantages of a 30-year mortgage Monthly payments on the loan are spread over 30 years, offering the borrower protection against future increases in interest rates and inflation rates while providing for the orderly repayment of the amount borrowed.
Pros of a 30-Year Fixed Mortgage
Low monthly payments: Assuming identical principle balances, a 30-year fixed-rate mortgage offers the lowest monthly payment among traditional fixed-rate loans.
A conventional loan is a great option if you have a solid credit score and a low DTI. Conventional mortgages are also a popular choice for home buyers making a down payment of 20% or more. That's because paying more upfront means lower monthly payments and avoiding paying private mortgage insurance (PMI).
Predictable monthly P&I payments allow you to budget more easily. Protection from rising interest rates for the life of the loan, no matter how high interest rates go. May be a good choice if you plan to stay in your home for a long time.
Conventional loans are often the best option for borrowers with strong credit who can contribute a down payment of at least 3%, or perhaps quite a bit more. Find out what conventional means in the mortgage industry, and whether it might be the right type of home loan for you.
Higher Closing Costs
As noted above, conventional loans tend to have lower closing costs (and be cheaper in general) than government-backed options. However, the downside of conventional loans is that they don't offer as much flexibility to help you avoid paying those costs upfront.
FHA loans allow lower credit scores and require less elapsed time for major credit problems. Conventional loans, however, may require less paperwork and offer better options to avoid costly mortgage insurance premiums.
Home sellers sometimes prefer conventional loans due to the stricter appraisal that's required with an FHA loan. An appraisal for an FHA loan might dig up more issues with the home, which in turn can delay the home sale process as the seller works to fix them.
A fixed-rate mortgage with a 30-year term may be a good option for you if you: Want to keep your monthly payment low without giving up the stability of a fixed rate. Want to get approval for a larger loan. Plan to stay in your home for the long-term.
Options to pay off your mortgage faster include:
Bi-weekly payments instead of monthly payments. Making one additional monthly payment each year. Refinance with a shorter-term mortgage.
A 30-year fixed-rate home loan is a mortgage that will be completely paid off in 30 years if the homeowner makes all the payments as scheduled. With a fixed-rate loan, the interest rate remains the same for the entire span of the mortgage. In most cases, a 30-year fixed-rate mortgage is a conventional loan.
The average 30-year fixed refinance APR is 7.21%, according to Bankrate's latest survey of the nation's largest mortgage lenders. On Tuesday, February 13, 2024, the national average 30-year fixed mortgage APR is 7.18%.
Conventional loans are preferred by many borrowers because of several reasons, including: There's no mortgage insurance if you make a down payment of 20% or more. If you do have mortgage insurance, you can stop paying for it once you accumulate enough equity in your property.
Conventional loans require lower down payments than government-backed loans. Conventional loans never carry prepayment penalties. Conventional loans take longer to approve than government-backed loans. Conventional loans typically have no legal limit on loan amounts.
Some reasons a seller might refuse an FHA loan include misconceptions about longer closing times, stricter property requirements, or the belief that FHA borrowers are riskier.
Sellers often prefer conventional buyers because of their own financial views. Because a conventional loan typically requires higher credit and more money down, sellers often deem these reasons as a lower risk to default and traits of a trustworthy buyer.
As unjustified as it may be, some sellers may hold a negative perception of an FHA borrower because they didn't meet the bar of a conventional loan's stricter requirements. Sellers may fear the deal will fall through during underwriting when credit and income are verified and assets and credit history are reviewed.
FHA Loan: Cons
Here are some FHA home loan disadvantages: An extra cost – an upfront mortgage insurance premium (MIP) of 2.25% of the loan's value. The MIP must either be paid in cash when you get the loan or rolled into the life of the loan. Home price qualifying maximums are set by FHA.
If you have a credit score of 700 or higher, a debt-to-income ratio of 35% or lower, and a 20% down payment for your loan, a conventional mortgage may be your best bet. If your credit score is lower than 640 or you can't put 20% down, you may want to consider an FHA or USDA loan instead.
Conventional loans often require a credit score of at least 620, which leaves out some homebuyers. Even if you qualify, you will likely pay a higher interest rate than if you had good credit. More stringent DTI requirements. Conventional loans typically demand higher DTIs than government programs do.
Most lenders offer conventional loans with PMI for down payments ranging from 5 percent to 15 percent. Some lenders may offer conventional loans with 3 percent down payments. A Federal Housing Administration (FHA) loan. FHA loans are available with a down payment of 3.5 percent or higher.
The minimum down payment requirement for a conventional loan is 3% of the loan amount. However, lenders may require borrowers with high DTI ratios or low credit scores to make a larger down payment. Even if it's not required, if you're able to make a higher down payment, you may want to consider doing so.
In most cases, if your name is on the title and you've paid on your current mortgage for at least six months, you'll be able to refinance with a conventional loan. This is common for borrowers with current conventional or VA loans.