What a 30-Year Mortgage Really Looks Like

March 30th, 2016

For some time now, the 30-year, fixed-rate mortgage has been the go-to loan for US homebuyers. As a result, a lot of people looking to purchase houses or condos take out this kind of mortgage each year.

That’s not to say there aren’t plenty of reasons for the 30-year mortgage’s enduring popularity. For starters, it’s often a potential homeowner’s most affordable option. (Sometimes it’s their only option.)

It also tends to be the safest and most stable mortgage for many people looking to buy property. The never-changing payments allow them to budget their spending and saving with the least amount of worry.

There’s more to a 30-year, fixed-rate mortgage than consistent payments over a 360-month period, though. Here are some additional details you should find useful as you consider applying for one of these loans.

The High Cost of Low Monthly Payments

One of the other benefits tied to 30-year, fixed-rate mortgages is they usually offer people the lowest monthly payments. (Compared to 20-year or 15-year fixed-rate mortgages, and even some adjustable-rate mortgages—at least during the initial period.)

The thing is, those low payments come at a cost. Literally. Over the term of a 30-year mortgage, you give your lender a lot more money than you would if you took out a shorter-term loan. Why? For a good part of those three decades, you’re mainly paying the mortgage’s interest.

With a 15- or even 20-year mortgage, you start paying off the principal much more quickly. Plus, shorter-term mortgages often offer lower interest rates. That lets homeowners chip away at more of the loan’s principal with each payment.

A Real-World Example of a 30-Year Mortgage

With all of that out of the way, you’re probably looking for a real-world example that helps show what it’s like to take on one of these loans.

Let’s say you decide to buy a home for $200,000. You save enough so you can afford a 20 percent down payment of $40,000. Then you find a financial institution that’ll give you a 30-year, fixed-rate loan – with an interest rate of 4 percent -- for the remainder.

In this situation, your monthly payments come to about $760. The entirety of that $760 won’t go toward your mortgage’s principal. At first, only a fraction of it will – probably 20 percent or less. The remaining 80 or so percent goes toward the loan’s interest.

Over time, that balance shifts. As you continue to make payments, more and more of the money you pay is dedicated to your loan’s principal. As you near the final years of your mortgage, most of your monthly bill pays off the principal.

Bad News, Good News

The bad news here is that when all is said and done with this loan, you’ll have paid between $300,000 and $350,000 to your lender—rather than just $200,000.

Of course, the alternatives may not seem any better. As was said earlier, if you went for a mortgage with a shorter term, you’d pay less overall, but your monthly payments would be a lot higher.

One solution, if you’re looking for some sort of middle option, is to send in one or more extra loan payments each year. Doing that lets you to cut into the principal more quickly and also reduces how much interest you hand over moving forward.