Going with a 30 year mortgage?

The 30-year fixed rate mortgage sets the standard in home loans, but what you may not realize is that this plain vanilla loan may not necessarily be the right choice for you.

If you’re younger than age 35, have a steady income and plan to live in the same home for at least seven years, then the 30-year fixed loan is best. Chances are the interest portion of your monthly payments will be tax deductible. Disciplined borrowers can pay off their real estate loans in half the time if they send in about 50 percent more than what is due every month. In this way, borrowers reap the rewards of the 15-year mortgage but with the flexibility and tax advantages of the 30-year mortgage.

Of course, not all 30-year loans offer fixed interest rates. Some “interest only” loans let borrowers pay only interest during the first few years. The interest-only period can last for anywhere from a year to 10 years. The downside is that payments typically increase after that point. A borrower must also accept that for up to 10 years, the principal balance (the amount you borrowed not including interest payments) stays the same.

Some 30-year loans offer adjustable interest rates. This means that payments fluctuate as interest rates change. If interest rates go down, so does your payment. If they go up, your payment does, too. Interest rates don’t reset every month – instead, they reset on a schedule, usually annually. Fixed rates don’t change unless you refinance your loan to a new rate, a sometimes easy, sometimes lengthy process.

Before you commit to what will probably be the biggest purchase you will ever make, think about your goals and your personal financial profile. While you will probably be able to refinance or sell, if necessary, avoiding a costly mistake is best.

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