Analysis from Forbes questions whether the 30-year mortgage is good for the financial well-being of homeowners, due to the amount of interest accumulated during the term.
The 30-year mortgage started after the Great Depression under the premise that Americans would pay off the loan during their working years. While many credit 30-year mortgages for the accessibility to homeownership, Forbes said, there are rising concerns over the amount of interest consumers pay and the recent abuses in the system.
Forbes states that on a $260,000 home with a 30-year mortgage at 4%, the homebuyer would pay more than $186,000 in interest over the life of the loan. This number would drop to $80,000 in interest if consumers used a 15-year mortgage at 3.75%.
One of the benefits of a 30-year mortgage is payment flexibility.
“The lower 30-year mortgage offers payment flexibility for those future changes,” the report states. “You can pay your 30-year mortgage at the pace of a 15-year and then drop down to the 30-year payment when changes in your income occurs.”
Flexibility in finances is critical, as Zillow reported last month that 55% of homebuyers make a financial sacrifice to achieve homeownership. This number jumps to 71% for millennials and Generation Z homeowners.
Younger homebuyers are more likely to make more serious tradeoffs to achieve homeownership, as 13% of millennial and Gen Z homebuyers skipped healthcare services. This number falls to 8% for Generation X and 3% of older buyers. Zillow also states that younger buyers are more likely to reduce or cancel insurance coverage to save money for a home purchase.
"The fact that homebuyers have to make tradeoffs to save for the down payment is not surprising," said Kathryn Coursolle, an economist at Zillow. "That's pretty much the study of economics: how people make decisions when they can't have everything. But todays tradeoffs are non-trivial and often cut into more than just the 'nice-to-haves.' Indeed, some of those who manage to buy young are foregoing going to the doctor or paying for insurance. To buy young means sacrificing more, ostensibly for the ability to sacrifice less, later."