4 Reasons to Avoid a 30-Year Mortgage at All Costs

By Selena Maranjian Markets Fool.com

When Americans borrow money with which to buy a home, the most commonly used loan is the 30-year fixed-rate mortgage, with morethan 80% of homebuyers opting for it. Thirty-year mortgages have some definite pluses, but there are some meaning drawbacks, as well.

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Here are four reasons why you might want to consider some alternatives to the standard 30-year mortgage. See if they make sense to you and keep them in mind whenever you start the process of getting preapproved and then approved for a mortgage -- or a refinancing!

Image source: Getty Images.

Reason No. 1 to avoid a 30-year mortgage: It's costly

The main reason to avoid a 30-year mortgage is because it's costly. You'll typically pay more than twice as much in interest over the life of the loan with a 30-year loan as with a 15-year one. That, of course, is because the loan is lasting a long time.

Many people favor longer loans because their monthly payments are lower. That is indeed a factor worth considering. Check out the examples below to appreciate the difference in monthly payments with the two kinds of loans (assuming a 20% down payment in each case). Note that I assigned a lower interest rate for the 15-year mortgage because they typically feature lower rates.

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Home Price

Loan Amount

15-Year Monthly Payment at 4%

30-Year Monthly Payment at 4.5%

$200,000

$160,000

$1,184

$811

$250,000

$200,000

$1,479

$1,013

$300,000

$240,000

$1,775

$1,216

$400,000

$320,000

$2,367

$1,621

$500,000

$400,000

$2,959

$2,027

Source: Bankrate.com online calculator.

Clearly, the 30-year mortgage will cost you a lot less each month. But over the life of both loans, it will cost you a lot more -- in interest. Check out the examples below:

Loan Amount

Total Interest Paid with 15-Year Loan at 4%

Total Interest Paid with 30-Year Loan at 4.5%

$200,000

$66,288

$164,813

$300,000

$99,431

$247,220

$400,000

$132,575

$329,627

$500,000

$165,719

$412,034

$750,000

$248,579

$618,050

Source: Bankrate.com online calculator.

Reason No. 2 to avoid a 30-year mortgage: Higher interest rates

Next up: Interest rates. As I mentioned above, you'll generally get higher interest rates taking out a 30-year loan than if you take on a shorter-term one. PerFreddie Mac, the national average interest rate for a 30-year fixed-rate mortgage was recently 4.21%, compared with just 3.42% for a 15-year loan. (Those are up, respectively, from 3.68% and 2.96% a year earlier, showing how rates have been rising.) No matter what mortgage you decide to take on, be sure to compare mortgage rates. A little shopping can turn up better rates than you might have expected.

Image source: Getty Images.

Reason No. 3 to avoid a 30-year mortgage: Slow equity-building

Mortgages let us borrow money from a lender to buy a house and to slowly build equity in that home, as we pay off the loan over many years. With a 30-year mortgage, though, you'll build equity really slowly, as the loan stretches over three decades.

Reason No. 4 to avoid a 30-year mortgage: It lasts 30 years

A final reason to avoid a 30-year mortgage may seem rather obvious: because it lasts 30 years. That might not seem problematic when you take out the loan, but consider your age and your retirement plans. If you're 52 years old and you're considering taking on a 30-year mortgage, note that you'll be 82 when you finally pay it off -- if you make only your expected monthly payments. Most retirees would rather not have mortgage payments hanging over their heads when they're on fixed incomes.

Image source: Getty Images.

A happy compromise

In case you're feeling queasy about having or planning to get a 30-year loan, don't. You can wipe out much of its biggest drawback with a little discipline -- by making extra payments every month or in some other regular fashion. Paying just $100 or $200 more monthly can shave years off your loan and save you gobs of interest dollars, too. Be sure when getting pre-approved for and finalizing any mortgage that you're allowed to make prepayments without penalty.

Another strategy is to buy less home than you can afford, so that your loan is smaller and you can afford the steeper payments of a shorter-term mortgage.

As you deliberate over what kind of mortgage is best for you, consider all the issues above. A 30-year loan might indeed serve you best -- but remember that there are alternatives.

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