What Is a 30-Year Fixed-Rate Mortgage?

Written by Elijah BishopUpdated: 22nd Mar 2022
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When looking for a home, there’s more to consider than the number of bedrooms, yard size, and location. And if you’re like the average homebuyer, you may also need to consider how you will finance the home purchase. For many homebuyers, this entails obtaining a mortgage.

Mortgages are not all made equal. It is common for some lenders to offer a fixed interest rate that remains constant during the loan term. At the same time, others may provide you with variable rates that can fluctuate on a set schedule. Some mortgages must be paid off within 15 years, while others offer you 30 years. However, the most popular option is a 30-year fixed-rate mortgage for homebuyers. 

Keep reading to learn more about what a 30-year fixed-rate mortgage is, how it works, and whether it’s the best option for you.

What Is a 30-Year Fixed-Rate Mortgage? 

A 30-year fixed-rate mortgage is a home loan with a 30-year repayment period and an interest rate that remains constant during the loan’s duration. When you take out a 30-year fixed-rate home loan, the amount you make each month remains the same until the loan is paid off. 

For example, if the interest rate is 5% in the first year, it will be 5% in the second, sixth, fifteenth, and twenty-ninth years of the loan.

>> More: Best Mortgage Lenders

How Does a 30-Year Fixed-Rate Mortgage Loan Work? 

For starters, it’s a fixed-rate mortgage, which means your interest rate will remain constant for the loan duration. A 30-year mortgage with a fixed rate of 4.5 percent, for example, would remain at that rate for the entire 30 years, regardless of changes in the real estate or mortgage market.

If your interest rate remains constant, so will your monthly mortgage payment for the entire loan duration. This is one of the many reasons why most potential home buyers opt for a fixed-rate mortgage over an adjustable-rate mortgage. To fully comprehend how a 30-year fixed-rate mortgage works, we will look into its components: interest, principal, and amortization in the following section.

>> More: Fixed-Rate vs. Adjustable-Rate Mortgages

30-Year Fixed-Rate Mortgage Characteristics 

Below are some of the defining characteristics of a typical 30-year fixed-rate mortgage:

Interest

Lenders want you to borrow money because they earn a portion of the money you borrow in the form of interest. For a 30-year fixed-rate mortgage, the interest rate stays the same throughout the loan duration. So, if you qualify for a 3.85% interest rate, you’ll have to pay 3.85% every month for the 30-year loan duration. 

Principal

The principal is the initial amount of money borrowed from your lender to purchase your house. If you put down 20% ($40,000) on a $200,000 home and take out a loan for the rest, your principal debt will be $160,000.

Amortization

Amortization is a financial term for paying off a mortgage—or putting your debt to rest. An amortization chart shows how long your loan will last and how much principal and interest you’ll pay each month or year.

Pros and Cons of 30-Year Fixed-Rate Mortgages 

Pros:

  • Low monthly payments: A 30-year fixed-rate mortgage offers the lowest monthly payment among typical fixed-rate loans. If you’re able to lock in a low rate, you may benefit from thelow monthly payments that come with it.
  • Payment flexibility: A lesser payment can give you more leeway if you face financial difficulties, such as a layoff or a protracted illness. Alternatively, when your household income improves, you will be able to make larger or additional payments, reducing the mortgage term and the amount of total interest you pay.
  • Predictable monthly payments: Your mortgage payment stays the same, no matter how stormy the economy gets or how high the interest rates climb. 
  • Low rates are locked in for 30 years: If you acquire a cheaper mortgage rate, that rate is locked in for the loan duration. Variable interest rates can shift as the economy changes.
  • More house: Because applicants are qualified based on their ability to make payments, a 30-year fixed-rate loan allows you to buy a more expensive home.

Cons:

  • Higher interest rate: The longer a lender’s risk of not being repaid is spread out (the longer the lender’s money is tied up), the higher the interest rate.
  • More total interest paid: Assuming both loans are paid on time and held for the entirety of their terms, borrowers with 30-year mortgages pay significantly more interest than those with 15-year loans.
  • Slow equity growth: Because most of the payment goes to the interest over the first ten years, homeowners with 30-year mortgages are more likely to develop littlehome equity
  • You may overborrow: You may be tempted to stretch your financial limits because you can qualify for a larger mortgage. Maxing out your credit may leave you unprepared for life’s unexpected twists.
  • More expensive maintenance:  If you go for a pricier home, you’ll face steeper costs for property tax, upkeep, and utility bills.

Types of 30-Year Fixed-Rate Mortgages 

FHA 30-Year Fixed-Rate Mortgage

FHA loans are backed by the Federal Housing Administration, which is a part of the Department of Housing and Urban Development (HUD). As a result, if you default on your loan, the FHA protects your lender.

With some lenders, you may get an FHA loan with as little as a 3.5 percent down payment and a credit score of 580. Your lender may also want proof of consistent work and a less than 50% debt-to-income ratio. FHA loans are more accessible, but you have to pay for mortgage insurance if you apply.

>> More: Best FHA Mortgage Lenders

Conventional 30-Year Fixed-Rate Mortgage

There are two types of conventional loans. Conforming loans which are mortgage loans that meet the criteria to be sold to Freddie Mac or Fannie Mae. And non-conforming loans, which do not conform to the rules set by Freddie Mac or Fannie Mae.

Conventional loans do not follow a standardized list of borrowing requirements due to various restrictions. They have more stringent requirements than government-backed loans, such as FHA loans. To qualify for a conventional loan, you may need to present a minimum credit score of 620 is required and a debt-to-income (DTI) ratio of less than 50%.

Interest rates for conventional loans fluctuate daily, although they tend to be lower than FHA loan rates. When compared to VA loan rates, they are frequently higher.

30-Year Fixed-Rate VA Loan

Lenders face less risk because a VA loan is backed by the Department of Veterans Affairs (VA). However, you must have a certificate of eligibility (COE) to prove your eligibility. Active-duty military personnel, veterans, and surviving spouses are typically eligible.

Due to its lenient credit standards, VA loans fall into non-conforming loans. They offer favorable loan terms, low-interest rates, and no down payment requirement. Borrowers are also not required to pay mortgage insurance. Keep in mind that requirements may differ amongst lenders.

>> More: Best VA Mortgage Lenders

30-Year Fixed-Rate Mortgages Historical Averages 

In 1971, when Freddie Mac began surveying lenders, 30-year fixed-rate mortgages ranged from 7.29 percent to 7.73 percent. The annual average inflation rate started to rise in 1974 and continued to rise until it reached 9.5 percent in 1981. As a result, lenders raised rates to keep up with unchecked inflation, causing consumers to experience mortgage rate instability.

The Federal Reserve combated inflation by raising the federal funds rate, which is an overnight benchmark rate charged by banks to one another. Federal reserve rate hikes continued, pushing 30-year fixed mortgage rates to 18.63 percent in 1981. The Fed’s plan eventually paid off, as inflation returned to normal historical levels by October 1982. For the next two decades, mortgage rates stayed in the single digits.

Mortgage rates continued to fall until they reached 3.31 percent in November 2012, the lowest level in mortgage rate history. In context, the monthly payment for a $100,000 loan at the record peak rate of 18.63 percent in 1981 was $1,558.58, while it was $438.51 at the historically low rate of 3.31 percent in 2012.

When the COVID-19 epidemic hit in 2020, there was a revival of declining rates. At the time, the Federal Reserve reduced the federal funds rate to 0%. Meanwhile, 30-year fixed-rate mortgages slipped below 3% in December 2020, averaging 2.67 percent. This was yet another blow for the mortgage business.

Mortgage rates begin to rise gradually in the second half of 2021. In December 2021, Freddie Mac reported an average interest rate of 3.05 percent for 30-year fixed-rate mortgages.

>> More: How to Choose the Best Mortgage

How Often Do 30-Year Mortgage Rates Change? 

30-year fixed-rate mortgage interest rates fluctuate often. Several variables influence the alterations, including:

  • Housing Market Dynamics: When housing demand increases, lenders raise their borrowing rates. Similarly, when demand is low, interest rates are reduced.
  • Federal Regulations: The federal funds rate is set by the Federal Reserve, and it is the interest rate that financial institutions pay to borrow money.

However, don’t be alarmed if interest rates rise when you begin looking for a home and when you contact a lender. A little higher rate may not substantially impact your monthly payments. 

Can You Refinance a 30-Year Fixed-Rate Mortgage? 

It is possible to refinance a 30-year fixed-rate mortgage. If you choose to refinance your mortgage, you may be able to make other adjustments to your loan at the same time. You may also be able to reduce your monthly payments, decrease your loan term, or borrow from a portion of your available home equity, depending on your circumstances.

>> More: See the Best Mortgage Refinance Lenders

Is a 30-Year Mortgage Better than a 15-Year Mortgage?

Both a 30-year mortgage and a 15-year mortgage have their advantages and disadvantages. A 15-year mortgage reduces your total borrowing costs while allowing you to pay off your loan in half the time. 

A 30-year loan, on the other hand, has smaller monthly payments, which can free up part of your money to save for other purposes or to cover unexpected needs. Before choosing a mortgage type, you should discuss your financial situation with a reputable lender for proper guidance. 

How Does Interest Work on a 30-Year Mortgage? 

The interest rate you pay on a 30-year mortgage is determined by the type of loan you obtain. A fixed-rate loan will have the same interest rate throughout the loan term, but an adjustable-rate loan’s interest rate will alter regularly.

Can You Pay off a 30-Year Fixed-Rate Mortgage Early? 

If you stick to your repayment plan, you’ll be able to pay off your 30-year fixed-rate mortgage in 30 years. Many homeowners, however, have the option of paying it off early. Paying off your mortgage early can save you thousands of dollars in interest in the long run. However, it may not be suitable if you have other high-interest debt to pay or your lender charges prepayment penalties.

Bottom Line: 30-Year Fixed-Rate Mortgages 

A 30-year fixed-rate mortgage has advantages and disadvantages. While your monthly payments are lower and your repayment options are more flexible, your overall costs are higher. As a result, a 30-year fixed-rate loan may not be suitable for every homeowner. It is essential that you are aware of all of your mortgage options before making a decision.

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Elijah Bishop
Elijah Bishop

Elijah A. Bishop is a Senior Personal Finance Writer who has been writing about real estate and mortgages for years. He has a Bachelors of Arts Degree in Creative writing from Georgia State University and has also attended the Climer School of Real Estate. He also holds a realtor license and has been in and out of the US mortgage industry as a loan officer. Bringing over 15 years of experience, Elijah produces content that analyzes ethnicities, race, and financial well-being. His areas of expertise are mortgages, real estate, and personal loans.