Summary: This is part of an ongoing series that explains the different types of mortgage…
Home financing is an exciting and intimidating process. Though this may be one of the largest transactions you ever make, there is no denying the fact that a mortgage is your gateway to the “American Dream.” In the past, loan terms ran about five years with a large balloon payment at the end, which led many families down the path of refinancing before the final payment was due. Thankfully, the government stepped in, insuring mortgages and extending their terms up to 20 years. Thirty-year mortgages soon followed with interest rates lower than their shorter counterparts. Today, a 30-year fixed rate loan is practically the standard and constitutes the vast majority of mortgages currently held. Moreover, 30-year fixed rate loans are also very popular in Oregon, especially in stronger markets like Portland and Salem.
How Does This Type of Loan Work?
Stripped down to bare essentials, the 30-year fixed rate mortgage covers loan amounts that rise to 80 percent of the total value of the property. For example, a $200,000 house would not exceed $160,000. As a result, a borrower must cover the rest either by bringing a $40,000 down payment for a purchase or by having that much equity — i.e. ownership — in the house for a refinance. In this instance, if the application is approved and the loan closes without problem or issue, then the payments are amortized over a 30-year period. A $200,000 loan borrowed at four percent interest over 30 years would require a monthly payment — in principal and interest — of $954.83. Since the rate is fixed, your loan amount would not change, and after 360 payments, your hypothetical loan would be paid in full.
Now for the Caveats
Of course, there is more to that monthly amount than meets the eye. For instance, many homebuyers or borrowers in more expensive Oregon cities like Eugene, Portland, and Salem, do not have 20 percent to bring to the transaction and are, nevertheless, paying down 30-year fixed mortgages. But how is this possible? Well, thanks to mortgage insurance ever since the 1950s, home buyers and owners have been able to take out loans with even less than 20 percent by purchasing government or private mortgage insurance. With such coverage, a homebuyer is approved on the condition that they keep the insurance in place until their loan-to-value (LTV) ratio drops below 80 percent. To secure this commitment, lenders escrow each month for the mortgage insurance premium. This increases the payment per month.
Other payment inflators affect more homeowners. Since the property serves as collateral, banks have an interest in keeping it intact and available. To lose the house to fire or the taxing authority is a major blow to the lender’s portfolio. Accordingly, most financial institutions escrow for property taxes and hazard insurance. Flood insurance premiums, where applicable, are also collected monthly. Escrows ensure that the property is there for the taking in the event that foreclosure is necessary. These additional payment components can fluctuate. That said, the principal and interest are set in stone. Plus, overall, this is an attractive option for Portland, Oregon residents who like to plan for the future.
Interest Higher for Longer Terms
If you are ready to move into your Portland or Oregon dream home, a 30-year fixed mortgage may very well be right for you, which is great. But, as a savvy homebuyer soon to be owner, you want to make sure that you are aware of the fact that interest is higher for longer term loans. Of course, this is not a bad thing. In fact, spreading the principal payments across three decades as opposed to, say, two has the indisputable advantage of shrinking the monthly outlay, which can be a good move in Portland, where even a small home is not cheap. Nevertheless, with principal, interest payments are often slightly higher for longer terms. Combined with the extended number of months in which it is collected, the larger interest element actually increases the total funds paid out — all other things being equal — over the life of the loan, i.e., the mortgage is more expensive than a shorter-term counterpart. As a result, if you are considering a 30-year fixed rate loan, just make sure it is the best option for you and your family—especially when measuring monthly cash flow against lasting savings.
Why Is the 30-year Fixed So Popular With Oregon Homebuyers?
As mentioned above, the 30-year fixed rate loan is disproportionately preferred by borrowers, particularly when buying homes in a seller’s market like Oregon. But, you are probably not chomping at the bit to give the banks more of their hard earned money than necessary? Yet, in order to purchase your contemporary forever home, sometimes it is necessary, especially with first-time home buyers who are often in the early stages of their careers. The 30-year option is especially popular in Eugene, where even a starter home may cost over 300,000. The household budget, in these cases, takes precedence over wealth building, at least in the beginning. Furthermore, maintaining smaller monthly expenses — even to the temporary detriment of the beloved nest egg — is paramount when establishing home and family. Plus, there are ways to whittle down the total liability of the mortgage loan.
How to Lessen the Total Obligation of the 30-Year Fixed
There are several avenues available to enjoy the monthly convenience of a 30-year loan while diminishing the overall price of same. For instance, you can prepay the interest in the form of discount points, or you can pay off the mortgage earlier than scheduled. Nonetheless, the drawback of discount points is that they are paid up front at settlement. Still, doing so can also save the borrower substantial interest if the loan is carried through to maturity. If funds are available and the mortgagor does not foresee a refinance in the future, points just might be the way to go.
Another alternative is paying off the loan early. Doing so years in advance of maturity can yield quite the savings. What’s more, early payoffs remove liens on the property and conveys a sense of financial confidence. Here, however, you should keep in mind that you must supplement your monthly payment to retire the mortgage ahead of time. Moreover, a portion of the funds allocated for your investments and retirement will likely go to the obligation on the house. Also, an early pay-off can deny a homeowner of the tax benefits of those pesky interest payments. Ultimately, these implications are best weighed against where you are in your life currently and how well-established you are financially.
How To Decide Whether the 30-Year Fixed Is the Best Option
Knowing everything we know, a few questions can help to determine whether this popular loan product is optimal:
- Where do you see yourself in 5, maybe 10 years? In other words, are your most productive years ahead of you, around you, or behind you?
- Are you on track to meet your financial and retirement goals?
- In a few years, will refinancing be right for you?
- How is the current state of the economy affecting you and your employment?
- What obligations did not show up on your credit report?
These inquiries help to decide the urgency of the present vs. that of the future. If you can predict comfortably absorbing the costs of a 30-year fixed rate mortgage over an extended period, this loan might be a good fit. But before making a final decision, speak with an informed loan officer in Oregon! A local loan officer that is well-versed in the details and upshots of 30-year fixed mortgage loans can help you achieve your home goals and ultimately help you make the best decision for you and your family. Making the best decision for your family and your budget is what matters most right now, so don’t go at it alone. Why not contact a mortgage professional who can deliver a rate quote, advise on the likelihood of approval, and provide real support. Even if a 30-year loan is not right for you now, a local mortgage expert can be the ally you never knew you needed and the key to purchasing your dream home. That said, if you want to get a pre-approval, then what are you waiting for? Contact us today for a free quote or consultation. You can also Apply Instantly or obtain a Rate Quote to get started.
Ready to Apply For a Mortgage in WA, OR, CO, or ID?
Do you have questions about home loans? Are you ready to apply for a mortgage to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.