The investing giant has strong opinions about this popular loan product.
- You have different options when it comes to financing a home, including 30-year, 20-year, and adjustable rate mortgages.
- Billionaire Warren Buffett believes that 30-year loans come with more advantages than other options do.
If you’re looking to buy a home, chances are, you can’t just purchase one outright. Rather, you may need to take out a mortgage to pay off your home over time.
When it comes to getting a home loan, you have choices. You could sign a fixed-rate loan — one whose rate is guaranteed to stay the same for the entire repayment period — or you could sign an adjustable-rate mortgage.
Within the realm of fixed loan products, there are different terms you can opt for. Most mortgage lenders offer 30-year loans, 20-year loans, and 15-year loans. Some lenders will even write a custom loan term, so if you want a 12-year mortgage or a 25-year mortgage, it’s possible to get one.
But investing giant and billionaire Warren Buffett is a huge advocate of signing a 30-year mortgage. Here’s why.
The upside of a 30-year loan
During a 2017 CNBC interview, Buffett called the 30-year mortgage “the best instrument in the world.” And there are definite benefits to signing a 30-year loan.
For one thing, it can make homeownership more affordable. With a 30-year loan, you’re paying off your home over a lengthy period of time, so your individual monthly payments will be lower than what you’ll pay with a shorter-term loan. That could open the door to homeownership if you’re on a budget and can’t swing higher payments.
What’s more, with a 30-year mortgage, you always have the option to accelerate your repayment period and get your home paid off sooner. Doing so could also save you a fair amount of interest on your mortgage.
By contrast, if you sign a 15-year mortgage in the hopes of saving money on interest, you’ll be locked into higher monthly payments. But you can actually sign a 30-year mortgage and treat it like a 15-year loan if your financial situation allows for that.
You can also refinance your mortgage
Another reason Buffett is a fan of the 30-year mortgage? If mortgage rates drop after you lock yours in, there’s the option to refinance and snag a lower interest rate. Or, if your income situation changes and you’re able to swing higher monthly payments, you can refinance a 30-year loan to a 15-year one.
Now, one danger in refinancing is resetting the clock on your mortgage. If you’re 10 years into repaying a 30-year loan and you take out a new 30-year loan, you’ll effectively end up taking 40 years to pay off your home. But in that case, you can always look at refinancing to a shorter loan term — for example, to a 20-year mortgage.
Take Buffett’s advice
Although Warren Buffett has enough wealth to buy countless homes outright, his points about the benefits of a 30-year mortgage are spot-on. This doesn’t mean a 30-year loan is automatically the best borrowing choice for every buyer. But it pays to consider the advantages of going with a 30-year mortgage, especially if you’re worried about swinging the monthly payments that would come with a shorter-term loan.
A historic opportunity to potentially save thousands on your mortgage
Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.
The Ascent’s in-house mortgages expert recommends this company to find a low rate – and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn’t influence our opinions of products, we do receive compensation from partners whose offers appear here. We’re on your side, always. See The Ascent’s full advertiser disclosure here.