Category: Loans

You plan on buying a house in the near future, and you know you’ll need a mortgage to do so. The question is, which type of mortgage may be best for you? Mortgages vary in term length, type of interest rate and the amount of interest charged. One available option is a 15-year, fixed-rate mortgage.

Still have questions or need more information? Below is an overview of what this article covers!

Topics Covered

1. Pros of a 15-Year Fixed-Rate Mortgage
2. Cons of a 15-Year Fixed-Rate Mortgage

Frequently Asked Questions

• What Is a 15-Year Fixed Mortgage?
• How Does a 15-Year Fixed-Rate Mortgage Work?
• What Makes up Your Mortgage Payment?
• How Much Can You Afford to Borrow?
• Is a 15-Year Fixed Mortgage Right for Me?
• Apply for a Home Loan Online

As you weigh your mortgage options, it’s important to understand how getting a 15-year home loan will affect your monthly payments and how much you end up paying for your home over the long run. It’s also important to understand how a fixed interest rate differs from an adjustable rate. Get all the details on a 15-year fixed mortgage so you can determine if it’s the right option for you.

What Is a 15-Year Fixed Mortgage?

A 15-year fixed mortgage is a loan with a repayment period of 15 years and an interest rate that remains the same throughout the life of the loan. Like other types of mortgages, you use a 15-year, fixed-rate mortgage to buy property. Many people obtain a mortgage to buy their primary residence, while others obtain a mortgage to buy a vacation home or property to rent out to others.

To understand what a 15-year fixed mortgage is, it helps to break down some commonly used terms in the mortgage business:

• Term: The mortgage term is the length of time you have to repay the loan. At the end of the term, the entire loan needs to be repaid to the lender. The length of the term influences the size of the monthly payments, as well as the interest charged on the loan. Mortgages with shorter terms, like a 15-year home loan, are considered less risky to the lender, so they often have slightly lower interest rates compared to longer-term mortgages, like a 30-year loan.
• Interest: Interest is the price you pay to borrow money, usually a percentage of the loan, such as 3% or 4%. A lender determines your interest rate based on factors such as your credit score, income, the loan term and the market. The type of interest rate — whether it’s fixed or adjustable — also plays a part in determining when you pay.
• Fixed-rate: Some mortgages have a fixed interest rate. With a fixed-rate mortgage, you pay the same interest rate throughout the life of your loan. For example, a 15-year mortgage with a 5% fixed rate will have a 5% rate until the borrower pays off the mortgage or refinances. One advantage of a fixed-rate mortgage is that it allows you to lock in a rate when they are low. You can rest assured that your mortgage principal and interest payment will stay the same month after month, no matter what happens in the market. On the flip side, if you get a fixed-rate home loan when rates are high, you could be stuck paying a high interest rate for years.
• Adjustable-rate: Unlike a fixed-rate home loan, the interest rate on an adjustable-rate mortgage (ARM) changes at various points throughout the repayment period. Often, an ARM may have an introductory rate. The introductory rate tends to be lower than the interest rate available on a fixed-rate loan. After the introductory period ends, the rate may change based on whatever is going on in the market. It can go up, meaning your monthly payments may go up. It can also drop, meaning you may pay less each month. Some borrowers take out an ARM initially and later refinance to a fixed-rate loan.
• Principal: The principal is the amount of money you’ve borrowed to buy your home. If you purchase a $250,000 house, pay a 10% down payment of $25,000 and borrow $225,000, the $225,000 would be the loan’s principal. If you can pay extra against the principal as you pay down your mortgage, you can shorten the length of time it takes to pay off the loan completely.
• Mortgage insurance: Depending on the size of your down payment, you may have to pay mortgage insurance on top of the principal and interest charged on the loan. Mortgage insurance offers an additional layer of protection to the lender, in case the borrower struggles to make payments. It is usually required when a person makes a down payment under 20% of the home’s value. You can cancel the mortgage insurance payment once you have paid off enough of the principal to have 20% equity in your home.

How Does a 15-Year Fixed-Rate Mortgage Work?

A 15-year fixed-rate mortgage works similarly to other types of mortgages. You apply for the loan by providing proof of income, employment, assets and your credit history. If approved, you put down a certain amount of money, then make payments on the loan each month until it is paid off. The amount you can afford to borrow when you apply for a 15-year fixed mortgage depends on a variety of factors.

When you apply for a 15-year fixed-rate mortgage, you will typically take the following steps:

1. Request a loan estimate from a lender: A loan estimate lets you know how much you can borrow, the interest rate and the anticipated closing costs. You can request estimates from multiple lenders to get a sense of what’s available. 
2. Indicate your intent to proceed: If you decide to move forward with one lender, you need to let them know. Lenders must honor the estimate for 10 business days, so you should decide if you’re moving forward within that time. 
3. Begin the application process: After you tell the lender you want to go ahead with the mortgage, you’ll need to submit documents, such as proof of income and bank statements, to start the formal application process.
4. Prepare for closing: If all goes well with the application, home inspection and process as a whole, you can get ready for the closing date. It’s important to keep things moving as scheduled, as a delay in closing can mean you lose the rate you locked in or that you have to start over.

What Makes up Your Mortgage Payment?

One miscalculation many aspiring homebuyers make is to assume their monthly mortgage payment only includes the principal and interest. In reality, your mortgage payment includes multiple components. When you take out a 15-year home loan, your monthly payments can be divvied up in the following ways:

• Principal payment: This portion of your monthly payment goes toward the amount you’ve borrowed. As you pay down your mortgage, you’ll likely see the amount of your payment that goes to the principal increases while the amount you pay in interest decreases. Many lenders also let you pay additional amounts toward the principal to help pay off your mortgage more quickly. Paying more than the minimum due toward the principal monthly can help you get out of debt sooner.
• Interest: Think of the interest rate on your mortgage as the money you pay the lender in order to use their service. The lower your interest rate, the more affordable the loan is. As you pay down the principal, the amount you pay in interest each month shrinks.
• Homeowner’s insurance premiums: Your lender may also collect your homeowner’s insurance premiums and put them in an escrow account to be paid to your insurer. The size of your premiums depends on the value of your house and the amount of insurance you buy.
• Property taxes: Your lender may also collect your property tax payments and put them in an account to be paid to your local government by the due date each year. Property tax amounts vary widely from location to location.
• Private mortgage insurance: If you put down less than 20%, your lender may require private mortgage insurance. The amount varies based on the size of your down payment. The more you put down, the lower the insurance premium. Once you’ve made enough payments to equal 20% of the value of your home, you can ask the lender to remove the insurance.

How Much Can You Afford to Borrow?

You want to have a sense of how much you can afford to borrow before you start looking for a home and applying for a mortgage. Usually, since you pay off a 15-year home loan in half the time it takes to pay off a 30-year loan, the amount you can afford to borrow is less. You might be able to purchase a $200,000 home by putting 20% down if you apply for a 30-year loan. Since the monthly payments on a 15-year loan are often about twice as much as those on a 30-year loan, you might be able to purchase a $150,000 home with a 15-year loan.

You can use a mortgage calculator to compare the monthly payments on a 15-year versus a 30-year mortgage.

To determine how much you can borrow with a 15-year mortgage, pay attention to how much you can afford to pay each month. Look at your total debt compared to your total income. When getting a mortgage, your ideal housing ratio, also known as a front-end debt-to-income ratio, is 28%. With insurance and property taxes included, your housing payments should be within 28% of your total income. 

Lenders also use the back-end ratio, which is all your debts compared to your income. An ideal back-end ratio is 36%. If you have other significant debts, such as student loans or car loans, your ideal monthly mortgage payment can end up being much lower than 28% of your total income.

While the 28 and 36% ratios are ideal, lenders understand that life can be complicated. Depending on your income or credit score, you might be able to borrow as much as 43% of your monthly income. 

To get your monthly payments under the desired percentage of your income, you may need to either pay off some debts before applying for your mortgage or find a way to increase your earnings.

Is a 15-Year Fixed Mortgage Right for Me?

Paying off your mortgage in half the time can seem pretty appealing. Before you decide to apply for a home loan with a 15-year term instead of a 30-year term, it’s important to consider your personal situation. You’ll pay the loan off sooner, but that usually means a higher monthly payment or buying a less expensive house. Some things to consider before applying for a 15-year fixed-rate home loan include:

• Your income stability: Since a 15-year mortgage typically means higher monthly payments compared to a 30-year home loan, it’s vital that you have the income needed to afford those payments. It’s also helpful if you have a steady record of earning either the same amount or increasing amounts of income each year. If there’s a lot of up-and-down in terms of what you bring in or if you aren’t sure how long your current employment and income situation may last, it may not be the right time to get a 15-year mortgage.
• Current interest rates: Take a look at the current interest rates. If they are low, getting a mortgage with a fixed rate is likely to be in your favor, as you’ll get to keep that rate for years to come. If rates are on the high side, you might consider an ARM instead. When it comes time for the rate on your loan to adjust, you can refinance to a fixed-rate loan or keep the ARM.
• Your age: Your age or season in life can help you determine if a 15- or 30-year loan makes more sense. If you are older and approaching retirement, a longer term may have you making payments on your loan after you’re no longer working. If you don’t want to have a mortgage throughout retirement, choosing one with a shorter term can make more sense.
• Your other financial goals: Consider your other financial goals in light of your mortgage. If you are trying to save for retirement or save for your child’s education, you may not want to pay a considerable amount of your monthly income toward your home. On the other hand, if you have already achieved other financial goals or have a high amount of disposable income each month, putting that toward your housing payment can be a good move.

• The price of homes in your area: The average price of houses in your area may influence whether you can afford a 15-year mortgage or not. The more expensive homes are, the higher your payment may be. But if homes are relatively affordable, getting a 15-year loan can help you own your home outright in less time and for less money.

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Pros of a 15-Year Fixed-Rate Mortgage

If you’re still not sure if a 15-year fixed-rate mortgage is right for you, it helps to look at a few advantages of this type of home loan:

• You build up equity more quickly: Equity is the difference between the value of your home and the amount you still owe on the mortgage. Having equity in your home gives you leverage. When you sell the home, you get more money from the sale if you have more equity in it. You can also use equity to borrow against your home to cover the cost of renovations or other repairs.
• You own your home faster: With a 15-year mortgage, you can own your home completely in half the time it would take if you were to get a 30-year loan. Once your home is fully paid off, your cost of living can drop significantly.
• You pay less in interest: Since you have a 15-year mortgage for less time than a 30-year loan, you usually end up paying considerably less in interest. More of your monthly payment goes toward the principal sooner. Although you have bigger monthly payments, the total cost of a 15-year loan is often much less than the cost of a longer mortgage.
• You might get a better interest rate: The less time you need to pay off a loan, the less of a risk you are in the eyes of a lender. Depending on other factors, many lenders are likely to offer lower interest rates on 15-year mortgages compared to 30-year loans.
• You don’t have to worry about interest rates changing: With a fixed-rate loan, the rate you pay on day one is the same as the rate you pay on day 5,000. You don’t have to worry that your payment may suddenly balloon or that you’ll be left with an unexpectedly high mortgage bill.
• You have the same payment month after month: A 15-year, fixed-rate mortgage eliminates one uncertainty from your life: How much your housing payment will be. When you rent, your monthly obligation can increase from year to year if your landlord decides to raise the rent. With an ARM, your payment can go up, as well. Your fixed-rate mortgage payment stays the same year after year, even if you begin to earn more money or other costs increase.
• You might be able to make a larger down payment: Since the price of the home you can buy with a 15-year mortgage could be lower than what you can afford with a 30-year mortgage, you may be able to put down more upfront⁠ — potentially saving you the cost of private mortgage insurance. For example, if you can afford a $200,000 home with a 30-year mortgage and have $30,000 to put down, your down payment would be 15% and you’ll have to pay mortgage insurance. If you can afford a $150,000 home with a 15-year mortgage and put $30,000 down, your down payment is 20%. Putting down 20% upfront can also make you more likely to get a lower interest rate, helping you save even more.

Cons of a 15-Year Fixed-Rate Mortgage

While a 15-year fixed-rate mortgage can have several benefits for the right borrower, there are also some potential drawbacks to consider:

• You have a higher monthly payment: Usually, the monthly payment required on a 15-year mortgage is higher than that required by a 30-year mortgage since you are paying the loan in half the time. If your income is high enough and you have enough financial stability, the extra monthly payment in exchange for saving more overall might not be a concern. But if you struggle to make ends meet each month or have other financial obligations, a high mortgage payment can be a challenge.
• You could end up “house poor”: You build up equity more quickly with a 15-year loan. This can also mean you end up house poor, meaning most of your net worth is tied up in your home. Day-to-day, that might not be an issue. But if you need cash quickly and don’t have a lot of savings or liquidity, it can pose a problem.
• You might have to buy a less expensive house: Depending on where you live, you might not be able to afford to buy a house with a 15-year mortgage. If housing prices are high, a 30-year loan might be a necessity to keep your monthly payment within reach. Another option may be to buy a smaller, less expensive home, such as a two-bedroom instead of a three-bedroom or a house in a neighborhood that offers fewer amenities.
• You might get stuck with a high interest rate: Interest rates fluctuate from year to year, so depending on when you buy your home, you may end up getting a higher rate compared to someone with similar income or credit who buys a home a year before or after you. Since the interest rate on a fixed-rate mortgage is the same for the life of the loan, you could be stuck with a high rate unless you refinance.

Apply for a Home Loan Online

Assurance Financial aims to help people achieve the American dream of homeownership. If you’re ready to make the first step towards buying your home, we’re here to help. Abby, our online mortgage assistant, can walk you through the process of putting together your application.

You can get started with Abby today or set up an appointment to put together your application at a time that works for you. If you’d rather talk to a representative right away, you can connect with a loan advisor in your state who can help you review your mortgage options and choose the one that works for you.

Sources

1. https://assurancemortgage.com/purchase-your-home/ 
2. https://www.consumerfinance.gov/ask-cfpb/on-a-mortgage-whats-the-difference-between-my-principal-and-interest-payment-and-my-total-monthly-payment-en-1941/ 
3. https://www.lendingtree.com/home/mortgage/common-mortgage-terms/ 
4. https://www.consumerfinance.gov/ask-cfpb/what-is-a-debt-to-income-ratio-why-is-the-43-debt-to-income-ratio-important-en-1791/
5. https://www.phila.gov/services/property-lots-housing/property-taxes/real-estate-tax/ 
6. https://www.mortgageloan.com/why-you-should-and-shouldnt-get-a-15-year-mortgage 
7. https://www.credit.com/blog/can-you-qualify-for-a-15-year-mortgage-113487/ 
8. https://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx 
9. https://www.nerdwallet.com/mortgages/mortgage-calculator/calculate-mortgage-payment 
10. https://www.bankrate.com/mortgages/arm-vs-fixed-rate/ 
11. https://www.rocketmortgage.com/learn/15-vs-30-year-mortgage 
12. https://www.fool.com/mortgages/4-reasons-to-get-a-15-year-mortgage.aspx 
13. https://www.bankrate.com/finance/mortgages/fixed-rate-mortgages-1.aspx 
14. https://www.quickenloans.com/learn/home-equity-and-how-to-use-it 
15. https://www.nerdwallet.com/article/mortgages/pros-cons-15-year-mortgage 
16. https://www.daveramsey.com/blog/what-is-a-15-year-fixed-rate-mortgage 
17. https://assurancemortgage.com/apply/ 
18. https://assurancemortgage.com/find-a-loan-officer/ 

When you’re shopping for a home, there’s more to consider beyond the number of bedrooms, size of the yard and the location. You also need to think about how you’ll pay for the house. For many homebuyers, that means applying for a mortgage.

Not all mortgages are created equally. Some offer a fixed interest rate, which remains the same throughout the life of the loan. Others have adjustable rates, which can change based on a schedule. Some mortgages need to be paid off within 15 years, and others give you 30 years to pay.

A 30-year fixed-rate mortgage is the most popular option among homebuyers. Learn more about what it means to take out a 30-year home loan, what a 30-year fixed mortgage rate means and whether this loan is the right option for you.

What Does a 30-Year Fixed Mortgage Mean?

A 30-year fixed-rate mortgage is a home loan with a repayment term of 30 years and an interest rate that remains the same throughout the life of the loan. When you decide to take out a 30-year home loan with a fixed rate, the payment you owe each month is the same until you’ve finished paying the loan.

If your first month’s payment is $1,000, your 12th month’s payment will be $1,000, your 36th month’s payment will be $1,000 and so on. If the interest was 5% during the first year of the loan, it would be 5% in year two, year six, year 15 and year 29.

A mortgage rate can either be a fixed interest rate or a variable rate. A fixed-rate does not change while you are paying back your loan, while a variable rate, also referred to as an adjustable-rate mortgage (ARM), can change throughout a loan.

What Is the Average 30-Year Fixed Mortgage Rate?

Many factors influence mortgage interest rates. The average interest rate has risen and fallen over the years as a result of market conditions and other factors. For example, in 1980, the average interest rate on a 30-year home loan was 13.74%. In 2000, it was 8.05% and 20 years later, in 2020, the annual average interest rate was 3.11%. In 2021, the average interest rate increased from 2.74% in January to 3.07% in November. Fannie Mae predicts that in 2022 the average mortgage rate will rise.

Some of the factors that affect mortgage interest rates are outside of the control of the average person. Supply and demand have an effect on rates, for example. When there is a lot of demand for mortgages, interest rates usually increase. When demand is low, rates drop to make getting a mortgage more appealing to consumers.

There are a few factors that influence interest rates that homebuyers can control. The amount of other debt you have can influence your interest rate. If you have a lot of debt already, a lender might consider you a higher risk compared to someone with less debt. To compensate for the additional risk, they are likely to offer a higher interest rate.

Your credit history and score also influence the interest rate on a 30-year mortgage. Usually, the higher your score, the lower your interest rate. If you don’t have favorable credit at the moment, it can be a good idea to work on improving it before you apply for a home loan.

Finally, how much you put down upfront can also affect your interest rate. The bigger your down payment, the less of a risk you seem to lenders. In exchange, they are likely to give you a lower interest rate compared to a person who is making a smaller down payment.

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Can You Pay Off a 30-Year Mortgage Early?

Thirty years seems like a long time. If you buy a house when you’re 35-years-old and get a 30-year mortgage, your last payment will be scheduled for right around the time you reach retirement at age 65.

One thing worth knowing about a 30-year mortgage is that just because you can take 30 years to pay it off doesn’t mean you are obligated to do so. Many lenders may let you pay off your loan early. Some do charge a pre-payment or early payment penalty, however. Before you pay extra on your mortgage, double-check to confirm that your lender won’t penalize you for doing so.

If you are interested in paying off your mortgage early, there are multiple ways to do so. If you get paid biweekly, you can try making biweekly payments on your mortgage instead of monthly. Divide your monthly payment in half and pay one half when you get your first paycheck of the month and the second when you get paid the second time. Since there are 26 biweekly pay periods in a year, you’ll end up paying 13 months’ worth of your mortgage rather than 12.

Another option is to add on an additional amount when you schedule your monthly payment. Even paying an extra $100 or $200 per month consistently can shave years off your mortgage.

How a 30-Year Fixed-Rate Mortgage Works

When you apply and are approved for a 30-year fixed-rate mortgage, two things are certain. Your interest rate will not change and your mortgage will be broken down into a series of payments over the course of 30 years. The payments include interest and principal together and remain the same throughout the loan.

Many homeowners also pay their property tax and homeowners insurance premiums with their mortgage payments. If you put down less than 20% of the price of the home, you will also have to pay private mortgage insurance (PMI) premiums until you’ve paid off enough of the principal to equal 20% of the home’s value.

Principal and Interest

The mortgage principal is the amount you’ve borrowed to pay for your home. If you buy a $250,000 home, pay a 20% down payment of $50,000 and borrow $200,000, the $200,000 is the loan’s principal. As you make payments on your mortgage, the principal shrinks.

Interest is the fee charged by your lender for giving you the loan. One way to look at it is the cost of doing business with a particular lender. Just as you might pay a lawyer or a doctor a fee for their services, you pay your lender for their services in the form of interest.

The cost of getting a loan can vary considerably from person to person because of interest. One borrower might be offered a 5% rate on a $200,000 loan, while another borrower might be offered a 3% rate.

Since interest is a percentage of the loan amount, it tends to be higher at the beginning of your repayment period than it is at the end. For example, when you first start making payments on your $200,000 home loan, you are paying 5% interest on $200,000. As you chip away at the principal, it shrinks and so does the interest in proportion.

Although you start out paying more interest than principal on your mortgage and eventually begin paying more toward the principal and less in interest, the payment you are required to make each month remains the same due to something called amortization.

Amortization Schedule

Loan amortization is the process of paying off your debt over a defined period with fixed payments. When a mortgage is amortized, the principal and interest are combined. It differs from other types of mortgage payment schedules because you pay the same amount and know what you need to pay from month to month. In addition to mortgages, other types of installment loans, such as car loans and student loans, typically get amortized.

An example of a mortgage that does not amortize is a balloon mortgage. If you were to agree to a balloon mortgage, you would make small payments each month for a set amount of time. Often, the payments would only cover the interest due on the loan. At the end of the repayment period, the remaining balance is due in full.

When you close on your house and finalize the 30-year fixed-rate mortgage, your lender can provide you with an amortization schedule. The schedule breaks down each payment over the life of the loan and details how much goes toward the interest on the loan and how much goes toward the principal. It also lists the ending balance on the loan at the end of each payment period, so you can keep track of your mortgage as you pay it off. You’ll also find the total amount of interest paid on the amortization schedule. The total interest gives you an idea of how much your mortgage will cost you over time.

Who Needs a 30-Year Fixed Mortgage?

Although 30-year fixed-rate mortgages are the most popular option for homebuyers, they are far from the only choice available. Some mortgages have adjustable interest rates, for instance. Adjustable-rate mortgages (ARMs) offer an introductory rate for a set period, such as five years. At the end of the introductory period, the rate changes based on the market.

An ARM can decrease if rates have dropped or increase if they have spiked. Although an ARM can offer you a lower rate than a fixed-rate mortgage at the start, there is the risk that your rate may increase later on, and with it, your monthly payment.

Thirty years is also not the only term available for a home loan. Some loans have 15-year terms. Less common are 10-year, 20-year or 25-year mortgages. The longer the mortgage term, the smaller the monthly payments are, as you have more time to pay the loan. A person who might struggle to make payments on a $200,000, 15-year loan might find they are comfortable making payments on a $200,000 30-year loan.

A 30-year fixed-rate mortgage can be the right option for you if:

• You live in an area with expensive housing: A 30-year home loan can put buying a home within reach, even in areas where the price of housing is high. Another way of thinking about it is that you can get more house for your money if you get a 30-year mortgage instead of a 15-year loan.
• You want a predictable payment schedule: Your mortgage payment can be predictable if you get a 30-year fixed-rate home loan. The interest and principal payment stay the same for the entire repayment period.
• You want a lower monthly payment: Since you are going to take twice as long to pay down the loan, the monthly payment on a 30-year loan is usually considerably lower than the payment due on a 15-year mortgage, even if the principal balance is the same. Paying less toward housing each month can mean you have more money to put toward other financial goals, such as saving for retirement or for your children’s education.

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Pros of a 30-Year Fixed-Rate Mortgage

For many borrowers, the pros of a 30-year fixed-rate mortgage make it worthwhile.

1. A 30-Year Fixed-Rate Mortgage Offers Flexibility

When you take out a 30-year fixed-rate mortgage, you can stick to the amortization schedule provided by your lender or you can choose to pay extra on the loan, reducing your debt and speeding up the process of owning your home outright.

For example, you may decide to pay several hundred dollars more than you owe each month when you have the space in your budget to do so. But if your expenses increase or your income drops, you have the option of paying what’s due on the loan and holding off on making extra payments until you can afford it again.

2. A 30-Year Fixed-Rate Mortgage Allows You to Buy “More House”

You can often afford to buy a more expensive home with a 30-year mortgage compared to a 15-year loan, depending on your income. If you live in an area with high housing costs, a 30-year mortgage can make it easier to buy a home that meets your family’s needs and fits within your budget.

3. A 30-Year Fixed-Rate Mortgage Can Create Space in Your Budget

Since the monthly payment on a 30-year mortgage is often lower than the payment due on a 15-year loan, it can give you some wiggle room in your budget. You can use any additional income you have to pay down your home loan more quickly, or you can choose to save it for a rainy day or for another financial goal.

4. A 30-Year Fixed-Rate Mortgage Is Available to More Borrowers

Depending on your income and other financial circumstances, you might find it easier to qualify for a 30-year mortgage compared to other options. Since the monthly payments are lower for a 30-year compared to a 15-year mortgage, you can qualify for a 30-year loan with a lower income.

5. A 30-Year Fixed-Rate Mortgage Is More Likely to Qualify You for a Tax Deduction

You can deduct the interest you pay on your mortgage from your income each year, but it’s not always the most appropriate option. For itemizing your deductions to make sense, the amount needs to be more than the standard deduction.

In 2022, the standard deduction is $12,950 for single tax filers and $25,900 for married couples who file a joint return. For a head of household, the standard deduction is $19,400. Since you often pay more interest on a 30-year mortgage during the early years of repayment, it can make you more likely to save on your tax bill.

6. A 30-Year Fixed-Rate Mortgage Eliminates Surprises

A 30-year fixed-rate mortgage can be an ideal option for people who like predictability. You know what your payments are, so you can create a dependable budget. You don’t have to worry about costs increasing year after year, so it can eliminate some stress from your life.

Cons of a 30-Year Fixed-Rate Mortgage

A 30-year fixed-rate mortgage does have some drawbacks that are important to think about.

1. You’ll Pay More in Interest

Over the course of 30 years, you are likely to pay considerably more in interest on your mortgage than you would on a loan with a shorter term. For example, if you borrowed $160,000 with a 3.37% interest rate, you would pay $94,726.03 in interest over the 30 years. If you borrowed the same amount with the same interest rate for 15 years, you would pay $44,086.16 in interest over 15 years.

2. Interest Rates Are Usually Higher

You don’t just end up paying more interest over the life of your home loan when you have a 30-year mortgage. You might also have to pay a higher interest rate. Lenders consider risk when they set interest rates. A 15-year mortgage is typically considered a lower risk to a lender, as the term is shorter and there is less of a chance of a borrower defaulting. While 30-year mortgages are very common, they are also considered higher-risk and usually have somewhat higher interest rates.

3. Thirty Years Is a Long Time

Another thing to consider before applying for a 30-year mortgage is that 30 years is a relatively long time. It’s difficult to envision what your life will be like at the end of your mortgage term.

One thing to remember is just because your mortgage will be paid off in 30 years, it doesn’t mean you need to keep the loan for that long. If you can afford to pay extra toward the mortgage, you are free to do so. You can also sell your home before the 30 years is up and use the proceeds from the sale to pay off the mortgage.

4. It Will Take Longer to Build Up Equity in Your Home

Your home’s equity is the difference between the value of your home and the amount you owe on the mortgage. When you take out a mortgage with a shorter term, you pay down the principal relatively quickly, building up more equity in your home. With a 30 year loan, it takes longer to chip away at the principal, meaning you have less equity.

The longer it takes to build up equity, the greater the chance you may end up upside-down on the mortgage if the market takes a hit. When you’re upside-down, you owe more on the home loan than the house is worth.

5. It Can Be Harder to Put 20% Down

You might qualify for a bigger loan with a 30-year term compared to a 15-year term. But it can also be more challenging to come up with a sizable down payment when you’re buying a more expensive house.

For example, you’ll need $40,000 to put 20% down on a $200,000 house. The amount jumps to $60,000 for a $300,000 house. Not having 20% to put down doesn’t mean you can’t buy a house. It simply means you’ll have to pay PMI and you may not get the best possible interest rate.

6. You Might Buy More Home Than You’re Comfortable With

Another thing to consider when getting a 30-year mortgage is that you might end up buying more house than you can take care of or manage. Bigger houses tend to have higher upkeep costs. They also tend to require more care and attention compared to smaller, less expensive homes. For example, if you buy a home with a large yard, someone will need to take care of the yard.

Apply for a 30-Year Fixed-Rate Mortgage

When you find the home of your dreams, your next step is obtaining the right mortgage to fund your purchase. For many homebuyers, a 30-year fixed-rate mortgage is the best option, especially if you can secure a low interest rate and low monthly payments. At Assurance Financial, our team can help you achieve your dream of homeownership, and our services can offer you customized options to cover your home purchase.

We know that every homebuyer has individual needs, and as mortgage experts, we can help you identify the right solution for your unique financial needs. While buying a home is an exhilarating experience, it also requires a firm grasp of your financial situation, a thorough understanding of the terms you’re agreeing to and a long-term commitment to paying back a loan. Assurance Financial can help make sure you don’t run into any unexpected surprises on your homebuying journey and deliver the following advantages when you choose to work with us:

• Large range of mortgage loan options: To serve each of our homebuyers, we offer a variety of loan options, including conventional loans, FHA loans, VA loans and construction loans.
• Comprehensive approach to lending: We complete the entire lending process under a single roof, from application to closing.
• Versatile application process: You can choose whether you want to complete your application online or with the assistance of one of our loan officers.
• Recognition: We are approved by Fannie Mae, Freddie Mac and Ginnie Mae to service and issue mortgages.

If a 30-year mortgage with a fixed rate seems like a good option for you, applying for a home loan can be simple. Get started on your application today or schedule an appointment with a loan officer at a time that works for you.

In the U.S., nearly 10 million people are self-employed, and the number is expected to increase by nearly eight percent over the next few years. If you’re among the self-employed, you know things work slightly differently for you than for people who hold traditional W-2 jobs. Your income stream is different, and your tax situation is different. When it comes time to go through the mortgage process and buy a home, you might find things are different for a self-employed person, too.

There’s good news about buying a home with self-employment: It is possible. In fact, if you have good or excellent credit and can prove you have a steady stream of income, you might find your mortgage experience is similar to that of your traditionally-employed friends and family.

Best Mortgages for Self-Employed First-Time Buyers

Whether self-employed or not, multiple mortgage options are available to you. The type of mortgage that will best suit you depends on your credit, the amount you have saved for a down payment and where you’re hoping to purchase a home. Some mortgages are backed or guaranteed by the federal government, while others are not. If you’re self-employed and looking for a mortgage, consider these options:

1. Conventional Mortgage

The simplest way to describe a conventional mortgage is as a home loan that isn’t guaranteed by the government. When a lender issues a conventional mortgage, they are taking on more risk because the government isn’t there to pay back some or all of the loan balance if the borrower can’t.

Typically, conventional mortgages have tougher qualification requirements compared to other home loans. Borrowers typically need to have a very good credit score to qualify for a conventional loan. There’s also the issue of the down payment. Although people often think you need to put 20 percent down to get a conventional mortgage, you can put down less and still qualify.

If you put down any amount below 20 percent of the value of the home, you’ll have to pay private mortgage insurance, in addition to the principal and interest due each month. Once you’ve paid off at least 20 percent of the home’s value, you can ask the lender to remove the private mortgage insurance premium from your loan.

The term of a conventional mortgage can be up to 30 years. The longer the mortgage term, the more you’ll pay in interest over the life of the loan, but the lower your monthly payment will be. Conventional mortgages also offer the option of having a fixed interest rate, which stays the same for the life of the loan, or an adjustable rate, which fluctuates with the market.

2. FHA Loan

FHA loans are insured and guaranteed by the Federal Housing Administration (FHA). The FHA itself doesn’t make the loans. Instead, a mortgage lender or bank does. If a borrower defaults or isn’t able to pay back their mortgage, the FHA will step in. Since the FHA loan program offers extra protection to a lender, borrowers who might not have the best credit are often able to qualify for them.

FHA loans require a minimum down payment of 3.5 percent. If you have a higher credit score and can afford to make a bigger down payment — at least 10 percent — getting an FHA loan might not make sense for you, because of the fees and mortgage insurance requirements.

The loans require the borrower to pay mortgage insurance, in the form of a 1.75 percent fee at closing and a fee between 0.45 and 1.05 percent every year. Unlike a conventional mortgage, the annual mortgage insurance payment is often required for the life of the loan, even after a borrower has paid 20 percent of the value of the home. The only way to remove the mortgage insurance premium is to refinance to a conventional mortgage.

Like conventional loans, FHA loans are available in terms of up to 30 years. Interest rates can be fixed for the life of the mortgage or adjustable.

3. USDA Loan

If you’re self-employed and have always dreamed of living in the country or a relatively rural area, a USDA loan might be the mortgage that works for you. The USDA loan program provides mortgages with zero percent down on homes in designated areas. Two types of USDA loans are available: direct loans, which come right from the USDA, and guaranteed loans, which are made by a private lender. The guaranteed loan program is backed by the U.S. Department of Agriculture and guarantees up to 90 percent of the value of the loan.

Along with buying a home in an eligible area, you need to meet certain income requirements to qualify for a USDA loan. The mortgages are intended for people who have low to moderate incomes. The USDA provides an income eligibility calculator to use to see if your household falls below the maximum income threshold. Income maximums are based on the type of loan program. The maximum allowed income is lower for direct loans than it is for guaranteed loans.

It’s worth pointing out that although you can’t use a USDA loan to purchase a home in the middle of a major city or urban area, the “rural” requirements might not be as rural as you think. Many homes in suburban areas qualify for USDA loans.

4. VA Loan

A Veterans Affairs loan is a type of mortgage available to people who are either currently serving in the armed forces or who have in the past. How long you need to have served with the armed forces depends on when you were on active duty, usually anywhere from 90 days to 24 months. If you were married to someone who died while on active duty, you can also qualify for a VA loan.

Like USDA loans, VA loans allow you to buy a house without a down payment. Unlike FHA loans, there is no mortgage insurance premium required for VA loans. Interest rates on a VA loan also tend to be lower compared to other mortgages. Closing costs are also often lower, as well.

5. Bank Statement Loan

Unlike an FHA, VA or USDA loan, a bank statement loan isn’t a type of mortgage program. Instead, it’s a process of approving a person for a loan without requiring them to provide proof of income, such as a tax return. When issuing a bank statement loan, a lender looks at anywhere from one to two years worth of your bank statements to get a sense of your total incomings and outgoings.

A bank statement loan can be a viable option for a self-employed person who doesn’t have income tax returns or other verifiable proof of income. The trade-off is that the interest rate on the loan tends to be higher than for other options since the lender is taking on somewhat greater risk.

Self-Employed Mortgage Checklist

What You Need to Have When Applying for a Home Loan

Whether you go for a government-backed loan, a bank statement loan or a conventional mortgage, a lender is going to require a fair amount of documentation before approving you for a home loan. Some of the paperwork you will need to show a mortgage lender includes:

• Tax returns: You’ll need to submit business and personal tax returns if you have them. Your lender will look at your net business income to determine your eligibility. Depending on how long you have been self-employed, you might need to provide at least one or two years’ worth of returns.
• List of current debts and monthly payments: If you have any additional debts, you will have to let your lender know about them, including how much you pay toward your debt monthly. Having additional debt can affect the size of the mortgage you’re eligible for.
• Bank statements: If you decide to get a bank statement loan, you might need to provide up to 24 months’ worth of bank statements. Even if you verify your income using your tax returns, your lender will most likely still ask to see at one month’s worth of bank statements.
• Declaration of assets: Lenders also want to see proof that you have enough money for a down payment. You might need to submit a list of your assets, including money in savings account and investment accounts, when you apply for a mortgage.
• Additional sources of income: If you have other sources of income, such as alimony, Social Security or income from a job, your lender might want to see it, especially if it will affect your eligibility.
• Proof of current housing payment: You might need to give your lender canceled checks or other proof of payment for your current mortgage or rent.
• Verification of your business or employment: It’s not enough to say you’re self-employed. A lender will often want to see proof. The proof can be in the form of a business license, membership in a professional organization, letters from clients or a statement from your accountant.

In addition to documentation verifying your income, assets and debt, lenders might also ask that you fill out several forms, giving them permission to access certain information. For example, you might need to complete Form 4506-T, which gives the lender permission to access transcripts of your tax returns from previous years.

The exact documents required might vary from lender to lender. In some cases, there might be some flexibility from a lender. For example, if you don’t have one document, they might be willing to accept another in its place. What you need to provide might also vary based on your income and how long you’ve been self-employed. Usually, the higher your income and the longer your history of stable self-employment, the smoother the mortgage process will be.

What Lenders Like to See From Self-Employed Loan Applicants

Some self-employed mortgage candidates are more attractive to lenders than others. Buying a house if self-employed can be an easier process if you can show the lender what they want to see. A few things that will make your application more appealing and more likely to be approved include:

1. Good or Excellent Credit

The higher your credit score, the better, if you want to buy a house as a self-employed person. A good credit score is one that’s over 670, while an excellent score is one that’s over 800. Having a good to excellent credit score shows a lender that you have a history of making payments on time, of not taking on excessive amounts of debt and a decently long history of using credit.

If you aren’t sure what your credit is, it’s a good idea to request your score before you start the mortgage process. If it’s not good, you have time to raise it before you apply or begin looking for a house. Some things you can do to increase your score include paying on time, paying off high amounts of debt and avoiding opening new accounts.

Usually, lenders will check your personal credit before approving or denying your mortgage application. If your business has a credit rating, they will also look at that.

2. Stable Income

For the most part, your business or self-employment track record should be on the up-and-up. A lender not only wants to see proof of steady income over the years, but they also want to see some evidence that your income has grown over time. If your income has dropped in recent years, that can be a red flag or cause for concern for a lender and can affect your ability to be approved or can affect the size of the loan you qualify for.

If you had one or two bad years but an equal number or more good ones, you probably don’t have too much to worry about when it comes to getting approved for a mortgage. Your lender is likely looking at the big picture, not at micro trends. If one bad year is followed up by several years of increasing or steady income, a lender will most likely still approve your application.

3. Money in the Bank

In addition to the money you are using for a down payment, a lender might want to see that you have a reserve of cash to use in case times are tight. Having a sizeable emergency fund, such as several months to a year’s worth of mortgage payments set aside can make you more attractive as a borrower.

Another reason why it’s a good idea to have money in the bank is that you might need it to cover the cost of repairs or other surprise expenses as a homeowner. Ideally, you’ll be able to avoid taking on additional debt after you buy your house to keep it in good condition.

4. Steady Work

Someone who works a full-time, salaried or hourly wage job usually gets up and goes to work for 40-hours a week. Self-employment work can be a little more difficult to quantify, but generally speaking, a lender wants to see that you have steady work available to you. There are a few ways you can show a lender that you have regular work. If you’ve been self-employed for a few years, your tax returns might be proof enough.

If you’re relatively new to self-employment, you might show a lender any contracts you have with clients or letters from clients that state that you are doing work for them. The contracts or letters could describe the nature of the work, including how long it might last.

5. Ample Down Payment

You don’t need to put down 20 percent to get a mortgage and a home as a self-employed person. But being able to make a larger down payment can improve your chances of approval. Generally speaking, people who can pay 20 percent upfront are seen as a lower risk compared to people who make a five or 10 percent down payment.

A bigger down payment shows a lender that you’ve been capable of saving up a considerable amount of money. It also sends the message that you’re invested in your new home and might be less likely to default, since you’re putting so much into it from the beginning.

6. Minimal Additional Debt

Ideally, you won’t be going into the process of applying for a mortgage as a self-employed person with a lot of other debt. Your debt-to-income ratio, or the amount of debt you have each month compared to your monthly income, should be on the low side. If you’re applying for a mortgage, 43 percent is usually the highest allowable debt-to-income ratio. As a self-employed person with a variable income, you might want to aim for an even lower percentage.

If you have a lot of debt, whether it’s credit card debt, student loans or a car loan, you might want to focus on paying it down before you apply for a loan, especially if you are self-employed.

Common Misconceptions About Getting a Mortgage While Self-Employed

There are some misconceptions and myths out there about the process of getting a home loan as a self-employed person. Small business owners might need to provide a lender with more or a different set of paperwork compared to employees, but overall, the process of getting approved is very similar for each type of person. Here are a few common sources of confusion when it comes to mortgages for the self-employed:

1. Lenders Look at Your Gross Revenue

For many self-employed people, it’s not quite clear what income a lender will use when deciding the size of loan someone is eligible for or if they’re even eligible at all. Lenders don’t look at your gross income or revenue — the amount you bring in before expenses and other deductions. They also don’t use your adjusted gross income on your tax return. Instead, they look at your net business income — the amount you bring in after you subtract relevant business expenses. That can mean the size of the loan you qualify for is smaller, but also that you’ll be more comfortable paying it back.

2. You Always Need a Co-Signer If You’re Self-Employed

You can be the only person on a mortgage, even if you’re self-employed. As long as you have good or excellent credit and a verifiable source of income, you should be good to go getting your own mortgage. There might be times when having a co-signer can be helpful, such as if you don’t have adequate proof of income, but they aren’t a requirement.

3. You’ll Get Stuck With a Higher Interest Rate

The interest rate a self-employed person pays on their mortgage can be the same or even lower than the rate a traditionally-employed person pays. The factors that influence interest rates include your credit score, how much you put down and the length of the mortgage. If you have an excellent credit score, put down 20 percent and get a 15-year mortgage, you might end up with a rate that’s lower than an employed person with a lower credit score gets by putting down 10 percent on a 30-year mortgage.

Get Started on Your Self-Employed Mortgage Application Today

Ready to see what type of mortgage is right for you or if you qualify for a mortgage as a self-employed person? Assurance Financial can help. We’re a team of loan advisors who can help you find the right mortgage and walk you through the process from beginning to end, step by step.

You can apply online in 15 minutes with us 24 hours a day, seven days a week.