Why would anyone get a 30 year loan on a house?

In My Humble Opinion (IMHO)
#1

I’m not sure how factual of an answer I can get to this. I’m not thinking of getting a house in the near future, but I was just playing around with the numbers. I assumed a 5% interest rate as I believe that’s pretty close to average and didn’t even consider the down payment so add that to the value of the home. If you buy a $200,000 house (a pretty nice house around here but the numbers scale) with a 30 year loan, you’ll pay roughly $187,000 in interest alone, nearly as much as the house. After 5 years, you’ll have paid only $16,300 of the principle.

On the other hand, you’d be making nearly the same monthly payments if you bought a $135,000 house/townhouse/whatever on a 15 year loan, would only pay $57,000 in interest, and after 5 years, you’ll have paid off $34,300 of the principle. If you move in a few years, you’ll be much better off with the 15 year loan with very little chance of owing more than it’s worth and if you stay, you can pay off the cheaper house and trade it in for that better house and get another 15 year loan. Sure house values will have risen by then but the interest you saved and rising wages should more than make up for it. You’d have to settle for a lesser home for a while, but most people get a lot more house than they really need anyway and 2/3 the price isn’t exactly going from Beverly Hills to Compton.

So why do so many people get these 30 year loans? Is there a financial reason or are they just trying to get the best they can regardless of the debt they’re putting themselves into?

#2

People take the maximum length to pay the minimum monthly payment - particularly if they are borrowing as much as they can vs. their income.

#3

When you make 50k and the median home price is 500k- you do what you can…

It’s why I haven’t purchased a home. Some people I know have a 50 year loan- their kids will inherit it, if they ever have any.

#4

We have a 35yr loan.

We could have bought a cheaper place, but it would be in a rough area and less conveninent for work and childcare.

We consider ourselves to be renting from the bank - the mortgage payments are no worse than rent would be, but it’s also easier to get a second mortgage once you have your first, so a foot on the ladder is good.

We also wanted the security of our own place - i.e. no landlord to give us 6 months notice to leave - with a minimum monthly payment. Both my salary and my wife’s salary will increase steadily over the next 10 yrs, which means we’ll be able to shorten the loan length at a later date.

Our goal at the moment, though, is to have our own house for as little per month as possible, while still staying in a nice area.

The 35 year loan is the compromise we accepted to achieve that goal.

#5

You’re allowed to pay more than the “minimum monthly payment.” That reduces the total interest you’ll pay and the time frame.

#6

What’s the downside of 30-year though? You can pay more if you want and less if you have to.

#7

In my opinion a 30 year is the best option, unless you can get a better interest rate for a shorter loan duration. People have come up with all kinds of schedules of how to payoff a 30 year loan in 15 and with the 30 year loan, if your situation changes (lose your job, etc.) you can go back to making the regular payment and may be better able to keep your house. On the other hand, the last time I refinanced, I could get a better rate on a 15 year loan and I could handle the payments, so I went with the 15 year loan.

#8

Some people get a “starter home” and then move into a bigger place after 5 years or so. I decided I’d moved enough in the military. I’ve bought my little chunk of land and I never want to move again.

#9

I bought my home with a 30 year mortgage. I then paid every cent I could spare each month, paying the loan off in just under 5 years. Worked for me.

Unfortunately, I then sold the house for exactly what I paid for it, due to “the market”.

#10

I live in New Jersey. Here, $135,000 will get you a dilapidated shack next to the highway. Maybe.

Although you pay a lot in interest, you take a sizable deduction against that interest, so that $187,000 figure isn’t entirely accurate. A 30-year mortgage allows you to have a nicer home with a manageable monthly payment. Every year I add another $100 to my monthly payment against principal to shorten my payback period, while still allowing me to take a nice deduction against interest. But it gives me the flexibility to only pay the mortgage amount, if necessary. When we bought, we wouldn’t have been able to afford the payments if we had gotten a 15 year mortgage.

#11

30-years interest rates are higher, at least back in 2004 when I was getting mine. But that didn’t stop me from getting a 30 year instead of a 20 year because I planned on paying it off early but wanted the flexibility in case I wasn’t able to.

#12

I thought about that, but the average home isn’t a half-million dollars across most of the United States.

Are you saying you couldn’t find any smaller house, townhouse, condo, or anything in a good neighborhood for 2/3 the value of your current house?

I understand about renting from the bank and all that, but why not go a little cheaper and be building up equity much more quickly?

Yes, but most people just make the minimum payments. If you get a 30 year loan just as a safety net while actually making larger payments and end up paying it off in 15 years or less, that’s understandable. It seems most people would rather just get a larger house that they can barely afford on a 30 year loan than do the financially sensible thing and get something for a bit less.

#13

Why not? If the monthly payments are right, and you stay in your house for 30+ years then who cares how much “extra” you’ve paid? You’ve had a house for 30+ years and now own a house. Why would you want “something a bit less” if you’d be more comfortable in the other place for 30+ years?

Some people don’t think of a house as a quick investment or a temporary holding place. You can’t take that extra money with you, but it sure is nice to live in a place you love.

And, how do you know that “most people” buy houses that are too big/expensive for them, and “most people” don’t pay extra towards their loan? You’re making out that you think everyone who has a 30 year mortgage is a sucker and doesn’t know how to manage their money. Go you.

#14

Like I said, the numbers scale. Can you really say there aren’t people in New Jersey with 30 year loans on houses that are really more than they need? I’m not saying you need to live in the ghetto, but many if not most people could get by just fine buying a less expensive place and would come out better in the long run by doing so.

I don’t understand what you mean by this. You mean a deduction on income taxes?

#15

Because with the money you save, you could have something even better for your second house, or could end up in the same house along with some investments, or whatever.

it’s been my experience. Do you have evidence to the contrary? I don’t doubt that most people on these forums are smarter than that, but not your average person.

#16

We originally got a 30-year loan when interest rates were higher (6.5%) and we couldn’t afford anything big enough for our family on a lower loan amount.

As soon as we could afford it – about 7 years - we renegotiated to a 15 year, 4.5% mortgage. So we shaved 8 years of the loan and tens of thousands of dollars in interest.

It’s still a modestly-sized home, but now our monthly payment is small enough that my wife doesn’t have to work and can stay home with our kids. That’s worth WAY more than a bigger house to us.

#17

The problem with your hypothetical is that you’re changing too many variables. When going from the 30 year to the 15 year you’re not only changing the loan time and the loan amount, you’re changing the entire house that’s being purchased!
It’s like asking why someone would buy a nice midsized car when you could have a perfectly serviceable five year old compact and save yourself $15,000! Why would people just throw their money away like that?

#18

Yep, this is me. 30 years isn’t optimal really but it is what it is for the most part: getting into more house than you can really afford at the moment.

I refinanced last summer and the 15 year mortgage turned out to be nearly the same payment amount that the original 30 year mortgage was ( after 7 years of payments and no longer having to pay for PMI).

So I went into the original mortgage knowing that I would be making more in my job in the future and hoping that interest rates would be low when it made sense to refinance.
In my case it worked out well. And as others have said, there is nothing to stop you from paying down the principal faster if you’re able to.

#19

Well, why wait just 5 years then? Think about how much more money you would have if you waited 10 or 20 years! Never getting the larger house if you can fit in the smaller townhouse would be the most financially rational thing to do. Obviously a lot of people place a premium on having the larger house.

#20

My parents had a 30 year. When he finally could afford it he put an extra $100/mo towards it and eventually when his savings matched his principle, he paid the whole thing off. They’re still in the same house 35 years on.

I have a 30 year. I pay an extra $100/mo towards it, because I can afford it.

My friends all live in $150-180k homes in suburban Ohio, with 30 year mortgages. They have kids so they can’t afford bigger payments or smaller homes.

Two sets of friends had to move suddenly and now have two mortgages because they can’t sell. Lucky for them they have 30 year mortgages and not 15, because they would be paying a lot more monthly for houses they don’t live in.

15 year mortgages are hella scary when you’re a young person/family. You don’t want to be locked in to a higher payment. What if we need repairs on this house we’re about to buy? What if you’re going to have a kid/more kids? What if you lose your job? What if your monthly income goes down? What if you have to move and can’t sell? Even if better rates come up, will you have the $5-10k cash on hand it might take to refinance?

For many, it’s much easier and financially smarter to take the 30 year at the lowest rate possible and pay extra when you can. It’s not a race to the finish. You do have a house during the times you’re paying the prescribed principle/interest. If you get to a point where you can pay the extra money towards the mortgage, then you should.

But if a house payment puts you in a position where you have to take out loans on higher-interest accounts (credit cards, car loans, school loans) then you’re doing it wrong. For a lot of people that’s the difference between being locked in to 15 years and moseying through life on a 30.

Getting bigger houses than one needs and/or being able to or wanting to “trade up” that a whole different story.