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Finance

What is a 30-Year Mortgage?

By R. Anacan
Updated May 16, 2024
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A 30-year mortgage is a secured loan used to purchase real estate. In exchange for the money that is borrowed from a lender, a borrower agrees to use the property as security for the mortgage. If the borrower defaults on the mortgage loan, the lending institution has the right to obtain possession of the property from the borrower.

When selecting a mortgage loan, a borrower can choose the period in which to repay the lender. The two most common loan terms today are the 15-year and the 30-year mortgage. If a borrower selects a 15-year mortgage, he agrees to repay the amount borrowed and any and all interest within 180 monthly payments, or 15-years from the date of the loan. If a borrower selects a 30-year mortgage, he agrees to repay the amount borrowed and any and all interest within 360 monthly payments, or 30 years from the date of the loan.

Selecting a loan term that is right for her specific needs is one of the most important decisions a borrower can make when choosing a mortgage. So how does a borrower choose whether a 15- or a 30-year mortgage is right for her? While there are many factors to consider, most borrowers make the choice based on the monthly payment that is most comfortable. The longer the repayment term of the loan, the less the monthly payment will be. The drawback to this is that over the life of the loan, the borrower will pay more in interest with a longer term than with a shorter term.

Here is an example; John is looking to borrow $100,000 US Dollars (USD) from his bank at a 6% interest rate to purchase a home. If John selects a 15-year mortgage his monthly payment would be $843.86 USD. Over the 15-year life of the loan he will pay $51,894.23 USD in interest to the bank.

If John selects a 30-year mortgage, his monthly payment would be $599.55 USD. Over the 30-year mortgage term, John would pay $115,838.19 USD in interest, which is considerably more than the $51,894.23 USD he would pay with a 15-year mortgage. Therefore John would need to determine whether paying approximately $240 USD less per month is worth paying $65,000 USD more in interest over the life of the loan.

To help decide which option is right when selecting a mortgage, a borrower should obtain documentation from the lender that details the total cost associated with obtaining the loan and the true cost of the loan over the life of it.

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