You should read this if you have a mortgage or are thinking about getting one.
- A 30-year mortgage is a popular home loan option.
- There are many advantages of 30-year mortgages, including the effect of inflation on your payments.
- A 30-year mortgage provides more flexibility in your budget and makes you eligible for a tax deduction.
When you get a home loan, chances are good a 30-year mortgage will be one option you consider. As the name suggests, these loans are paid off over a period of 30 years as opposed to loans with a shorter term such as a 15-year mortgage.
If you’re trying to decide which home loan is the best choice, be sure to consider these three little-known perks of 30-year loans.
1. Payments get cheaper due to inflation
If you get a 30-year fixed-rate mortgage, payments actually end up effectively getting cheaper over time. That’s because your payment stays the same for three whole decades, even as your money’s buying power declines because of inflation.
Say you got a home loan in 2022 with a $1,000 monthly payment. In 2052, you’ll still be paying $1,000. But, assuming a 2.5% average annual rate of inflation, the $1,000 you’re sending to your mortgage lender decades from now wouldn’t buy you $1,000 worth of goods and services in the future. Your $1,000 30 years from now would be worth around the equivalent of what $477 would be worth now.
Because inflation is constantly reducing the value of each dollar just a little bit, your mortgage gets cheaper in real terms every single month. And a longer mortgage loan means you’re getting more of a future discount than a loan with a shorter term would offer since inflation has more time to reduce the value of the money you’re using to make your payments.
2. You’ll have more flexibility in your monthly budget
When you have a 30-year loan, you can pay it off in less time if you want to. If you’ve got some extra money and want to use it to pay your mortgage balance down faster, you can. But you can also do plenty of other things with it as well, such as investing for retirement.
Since a 30-year loan has lower required monthly payments than loans with shorter repayment times would, you benefit from having more money in your pocket to use as you wish. This option is taken away from you if you commit to a loan that has a shorter payoff time but higher monthly payments.
Having flexibility is important as your financial goals (or income) may change over time.
3. You may be eligible to deduct mortgage interest if you itemize
Finally, if you itemize when you file your taxes rather than claiming the standard deduction, mortgage interest is tax deductible on loans up to $750,000. The ability to take a deduction for the interest you are paying enables you to get a government subsidy to help you afford your house.
If you have a mortgage loan for 30 years, you can get this tax deduction the entire time (unless Congress were to change the rules). With the government allowing you to pay interest with pre-tax dollars, your loan costs you much less than it otherwise would.
For each of these three reasons, you may want to opt for a 30-year loan if you are purchasing a home and comparing the mortgage options available to you. You can enjoy all of the benefits your loan offers for many years after moving into a home.