Most people's belief structures about mortgages are based either on truisms that may have been true for your parents 20 or 30 years ago or are the result of ideas that have become accepted as truth due to mortgage industry marketing propaganda. Let me give you some simple examples of popular folklore:
The best loan is the most popular one, a 30-year fixed rate mortgage. When refinancing, the objective is to lower your payment. If you can find a lender offering a no-point or no-cost loan, it's a good deal. To determine the best deal, evaluate each lender's APR. When shopping for a loan, it's important to check a number of lenders to get the lowest cost.
My guess is that almost everyone believes these myths. Sadly, they are all wrong - meaning if you follow them, you will end up paying more than other people who make different choices. You will pay more over the years and you will be in debt to the industry for a longer period of time. This is exactly what they industry wants and what you do not want.
One reason you hear so little about these myths is that each one of these, when consumers make decisions based upon them, increase the lending industry's profits. More to the point, they all increase your costs, exactly the opposite of what you want. You
The 30-year, fully amortized loan was "invented" by the government in the 1930's as a way of promoting home ownership. It has worked very well in that home ownership across our nation has expanded from less than 33% back then to over 66% today.
The most attractive feature of the 30-year loan is that the payment is so low. It's practically an interest-only loan during the first years, so it's easier to qualify for than loans with higher payments. Another good feature for borrowers is that it provides long-term rate protection, 30 years' worth.
When you say the word " mortgage ," many people think "30yearfixedratemortgage" as if it were all one word. In fact, the mortgage industry today offers hundreds of different types of loans. Because borrowers' needs vary so much, there are now many choices. Borrowers can choose a loan that fits their needs rather than just settling for the "one size fits all" 30-year fixed rate mortgage, the most expensive loan our industry offers.
This is most relevant because these days most people are in their homes for only 8 or 10 years. When you choose a 30- year mortgage, you have to pay about 0.5% more every year for that long term rate protection. If you move after 10 years, you paid 0.5% extra - $1,000 every year on a $200,000 loan - for 20 years of rate protection that you didn't use. $1,000 every year for 10 years is $10,000 wasted money!
When you do your planning, be realistic about how long you are going to be in your home and choose a loan that provides rate protection for that period. For people who need longer term protection, particularly those with large loans, consider a 10/1 ARM. For many people, buying risk protection 10 years at a time is suitable and much cheaper than getting a 30-year loan.