Using a 30-Year Mortgage to Offset High Prices in the Bay Area

Five key highlights from this article:

• The Bay Area is an expensive real estate market.
• Home prices have risen even higher over the past two years.
• Many buyers want to minimize their monthly payments.
• A 30-year mortgage can help you accomplish that goal.
• These loans can make homeownership more affordable.

It’s no secret that home prices in the San Francisco Bay Area far exceed the national average. In fact, we live in one of the most expensive real estate markets in the country.

As a result, many Bay Area home buyers do everything they can to minimize their monthly payments. One way to accomplish that is by using a 30-year fixed mortgage loan, as opposed to one with a shorter-term.

By spreading the monthly payments out over a longer period of time, you can greatly reduce their size. In this way, a 30-year mortgage could help some buyers afford to buy a home in the Bay Area.

Reducing Your Mortgage Payment with a 30-Year Loan

By spreading their monthly mortgage payments out over a longer period of time, Bay Area homeowners can reduce the size of those payments.

You already know that much. But you might not realize just how much you could reduce your monthly payments, when using a 30-year fixed mortgage versus a 15-year loan.

To see this in action, let’s do some calculations based on current mortgage rates and home prices within the San Francisco Bay area.

As of fall 2022, the median home value for the San Francisco-Oakland-Hayward metro area was around $1.4 million. During that same timeframe, the average rate for a 30-year fixed mortgage loan was around 6.6%. The average rate for a 15-year fixed was about 5.9%.

We plugged those numbers into a standard mortgage calculator, factoring for a 10% down payment and including taxes and insurance. Here’s what the monthly payments looked like, between the two different loan products:

• 30-year fixed: $9,717 per month
• 15-year fixed: $12,234 per month

Granted, many variables can affect the monthly payment. So we shouldn’t get too wrapped up in the exact numbers presented above. Instead, notice the difference in size between the monthly payments for a 15-year versus a 30-year mortgage, for the same loan amount.

Now you can see why the 30-year fixed is well suited for Bay Area home buyers who want to keep their monthly housing costs as low as possible. That’s what makes it America’s most popular loan option.

Even With a Higher Rate, the Payments Are Lower

In the example calculation above, we used the average mortgage rates at the time this article was published. You can see that the 15-year fixed mortgage had a lower average rate than the longer-term 30 year loan.

That’s almost always the case. If you look at the weekly mortgage rate survey conducted by Freddie Mac, going back many years, you’ll see that 30-year mortgages carried higher interest rates.

Even so, the monthly payments on a 30-year loan would still be much lower than a 15-year mortgage (with the same loan amount). Yes, the borrower with a 30-year fixed home loan would pay a higher interest rate than someone using a 15-year option. But the longer repayment window would still result in a much lower monthly payment.

Related: Buying a home with a 15-year loan

Other Advantages of the Long-Term Mortgage Option

Almost all mortgage options have certain pros and cons associated with them. The key is to choose the type of loan that works best for your particular situation, taking into account your long-term plans and goals.

We just covered the biggest advantage of using a 30-year fixed mortgage loan to buy a house in the Bay Area. It allows borrowers to spread their payments out over a longer repayment window, thereby reducing the size of those payments.

Fixed-rate mortgages offer another major benefit as well, especially when compared to adjustable-rate home loans. With a fixed mortgage, you know that your interest rate will never change, regardless of what the market does. Even if you kept the loan for the full 30-year term, the interest rate would never change.

The downside of using the longer-term loan option is that you end up paying more interest over time (compared to a 15-year mortgage). But for many Bay Area home buyers, this disadvantage is outweighed by the benefits of having a smaller monthly payment.

What’s Your Top Priority for Financing?

So there’s an obvious trade-off to be had here. Which mortgage option you choose really depends on your primary goals and objectives:

• Home buyers who want to reduce their total interest costs might be better off with the 15 year mortgage. You could get a lower rate, and for a shorter period of time.
• Budget-minded buyers who want to minimize their monthly payments should probably consider the 30-year option.

Here’s the bottom line to all of this. The San Francisco Bay Area is an expensive real estate market. The typical home buyer will want to do everything they can to minimize their housing costs, especially the monthly payment.

Using a 30-year fixed-rate mortgage can help you accomplish this goal. It will spread your payments over a longer period of time, resulting in a smaller monthly payment. So it might be your best path to homeownership in the Bay Area.