The 30-year fixed-rate mortgage is the most popular mortgage program in the United States. This longer loan term, as opposed to a 15-year loan term, for example, provides borrowers with lower monthly payment requirements.
There’s more to it than that, however. During the homebuying process, you’ll have to consider how much in housing costs you can afford each month, how long you’d like to be committed to a loan and fluid factors such as interest rates and the state of the economy.
Keep reading to learn more about the 30-year fixed-rate mortgage loan and whether it’s the right financial decision for you.
The 30-year fixed-rate mortgage: What is it?
Homebuyers often select the 30-year fixed-rate mortgage (FRM) for a variety of reasons. Namely, it offers interest rates that remain the same over the life of the loan. Because the loan term is so long, monthly payments are lower, as the total value of the home is divided into more payments over time.
While it takes longer, for example, to pay back a $200,000 mortgage by spreading out the total over 30 years rather than 10, 15 or 20 years, monthly payments will remain lower. Another key feature of the 30-year FRM is its fixed interest rate — in other words, interest rates do not change over time.
If you enter a mortgage agreement with a desirably low interest rate, that rate is locked in for the entire 30-year life of the loan. In that same vein, if you buy a home when interest rates are high, you’ll be locked into that rate, as well. There are options down the line to refinance a mortgage to a different rate, but at its core, the fixed rate over time is central to this type of mortgage.
While stretching out the loan term lowers monthly payments, 30-year fixed-rate mortgages usually require higher interest rates than short-term loans. These higher rates add up to thousands of dollars in interest over the life of the loan, so the total cost of your home will be higher over time than if you choose a loan with a shorter lifespan.
Why is the 30-year FRM the standard?
The 30-year fixed-rate mortgage is the most common type of mortgage in the United States. A report by the U.S. Bureau of Labor Statistics found that more than 60% of homeowners had financed their homes with 30-year FRM agreements between 2004 and 2014, while around 15% of homeowners had chosen 15-year FRMs.
There are a few reasons why the 30-year FRM has become so prevalent over time, including historical reasons why the federal government promotes such loans. The U.S. government introduced these long-term loans after the Great Depression — in addition to high levels of unemployment, the Depression was also marked by high numbers of homeowners defaulting on their loans.
At the time, loan terms were much shorter — five-year loans were common — and as household incomes and property values plunged, more and more people fell into delinquency on their homes when they couldn’t afford their high monthly mortgage payments.
In response to this housing crisis, the federal government introduced the long-term fixed-rate mortgage to make homeownership more affordable. Over time, this evolved into what is now the government-backed 30-year fixed-rate mortgage.
Benefits of the 30-year FRM
There are many reasons so many homebuyers are attracted to the 30-year FRM, beginning with lower monthly mortgage payments. As borrowers are required to pay less each month due to the length of the loan, buyers may be able to afford pricier homes that would otherwise have been unattainable.
Lower monthly payments create more financial flexibility for borrowers, as payments that are more affordable can generate the opportunity to spend less take-home pay on housing. Borrowers can then use that extra cash to save, spend or make other financial investments.
The fixed interest rates are also highly appealing to many buyers. If you opt into a fixed-rate mortgage, you can be sure that your monthly payments are not dependent on the mortgage market, and thus will not change, even if interest rates skyrocket at any point in the life of the loan. For borrowers, a fixed interest rate allows for more financial stability, as they can be sure that their mortgage payments will remain the same for decades to come.
Drawbacks of a 30-year FRM
Fixed interest rates and lower monthly payments make the 30-year FRM an appealing choice for many buyers. However, this mortgage option is not without its shortcomings. One of the most significant drawbacks of this type of loan is that it is paired with a higher interest rate than loans with shorter terms.
Over time, this higher interest rate builds, which translates to a greater total cost for a mortgage over 30 years. Essentially, in exchange for lower monthly payments, borrowers agree to pay more for their home over time.
In addition, while fixed interest rates are most often deemed a benefit, they may also become a drawback, depending on when a borrower purchased his or her home. If you bought your home with a 30-year FRM during a time when mortgage rates were high, you’re committed to paying back your home loan at that rate over time, even if mortgage rates fall sharply during the life of your loan.
However, if you find yourself paying a higher interest rate than is standard during your 30-year mortgage, you may still be able to refinance your mortgage to obtain that lower rate. This process, however, requires time as well as fees you’ll have to pay to successfully refinance.
Alternatives to a 30-year FRM
If you’re interested in paying for a home in fewer than 30 years, you may want to consider a 15-year fixed-rate mortgage. You’ll pay less in interest over a shorter amount of time, as these shorter loans are characterized by lower interest rates than their longer-term counterparts.
In exchange for lower interest rates, 15-year FRMs require higher monthly mortgage payments, as the life of the loan is condensed. These higher monthly payments are required to pay off a home loan more quickly and in a shorter period.
Any fixed-rate mortgage provides the same rate benefits of the 30-year FRM. Whether it’s a 10-year, 15-year or 30-year mortgage, FRMs allow borrowers to lock in their interest rates. If you’re confident, you’ll be able to make higher monthly payments over a shorter amount of time, especially if you buy your home at a time when interest rates are low, a 15-year FRM may be right for you.
However, keep in mind that these higher payments won’t change over time. If you lose your job or encounter unexpected expenses that strain your budget, you’ll still need to make those higher mortgage payments. As such, a 15-year fixed-rate mortgage is best for those with higher, stable incomes that will remain the same or grow over time.
You may also consider an adjustable-rate mortgage (ARM). These mortgages, whether for 15 or 30 years, are characterized by their shifting interest rates over time. Adjustable-rate mortgages are inherently riskier than fixed-rate mortgages. With an FRM, you’ll make the same mortgage payments every month at the same cost.
If you take on an ARM, your mortgage interest rates will fluctuate over time and, as a result, so will your monthly mortgage payments. Adjustable-rate mortgages may be a good option for those taking out loans with a much shorter lifespan — the 5-year ARM is a popular option. If you plan to sell your home within a few years of moving in, this ARM can help borrowers achieve significant savings, as initial mortgage interest rates may be low.
Keep in mind, however, that the initial, low signing rate, often called the “teaser rate,” earned that moniker for a reason. A low interest rate can turn into a high interest rate quickly as markets fluctuate.
How to start applying for a 30-year FRM
If you’re interested in applying for a 30-year fixed-rate mortgage, you have a lot to consider. Should you select a conventional loan or a government-insured loan? How will market rates affect your home purchase? Answering these and other questions are vital during the homebuying process, so it’s important you learn as much as possible to make smart choices when selecting a mortgage.
Start by assessing your resources. Determine how much you can afford for a down payment on a home and take a hard look at your finances. Depending on the loan you’re applying for, you’ll likely have to meet certain credit-score and down-payment requirements.
You should also make use of resources provided by the federal government and your state. Search for state resources to see whether you qualify for financial assistance such as low interest rates and down-payment assistance based on income, creditworthiness, the area in which the home is located, type of home and other factors.
Shop around for different interest rates by reaching out to at least a few mortgage lenders during your search. Carefully compare and contrast your options and keep an eye on market trends to make sure you get the best 30-year FRM possible. You can also speak to a mortgage broker or continue to do your research to find out more about buying a home and how to best apply for a 30-year fixed-rate mortgage.
The 30-year fixed-rate mortgage is a great option for buyers searching for a home they plan to stay in for the foreseeable future. It also makes homeownership more attainable for middle-income earners by reducing monthly payments on a home. You’ll pay a higher total cost over the life of the loan, but the 30-year FRM can also help you achieve homeownership and provide financial stability by offering fixed monthly interest rates for decades to come.