For generations, the 30-year fixed mortgage has reigned, like hot dogs and apple pie, as America’s gold standard.
We love it for it’s predictability and affordability. A 30-year fixed mortgage is a fully amortizing loan, meaning the principal and interest are combined. When the 30 years are up, the full amount will be paid off.
With all this boosting it, there’s little wonder the 30-year-fixed remains America’s favorite type of mortgage: Despite abundant options, 90% of homeowners go with a 30-year fixed mortgage, according to Washington-backed mortgage-guarantor Freddie Mac.
What Is a 30-Year Fixed Mortgage?
Thirty-year fixed-rate mortgages are the apple pie à la mode of secured credit. Homeowners (especially those with good-to-excellent credit) get:
- A low, unchanging interest rate
- A steady, affordable payment
- A larger loan (and, in all probability, more house).
Wait, there’s more. As their income grows, homeowners can — absent prepayment penalties, which are rare — make extra payments against principle to pay off the mortgage faster.
And if rates sink, you always can refinance!
Average 30-Year Fixed Mortgage Rate
Freddie Mac pegs the average interest rate for a 30-year fixed mortgage at 3.94% in 2019; experts predict rates will hover near a historically low 4% for the balance of 2020.
They’re not likely to drop — or rise — much in 2020, for assorted factors, many of them related to the presidential election looming in November. Traditionally, the Federal Reserve, whose rate-setting affects all lending, stays on the sidelines during election years.
Then again, events, too, can influence the direction of mortgage rates. When tensions heated up between Iran and the United States in January, mortgage rates slipped to a 13-week low of 3.62%, the lowest the 30-year rate had been since early November 2016.
The numbers quoted above are industry averages. Because they’re averages, mortgage shopping is advisable. Rates can — and do — vary slightly among lenders, but the rate you receive will depend on several factors, some within your control, others not.
The most well-known factor determining your outcome is your credit score, and that is very much within your influence.
|Credit Score||Interest Rate|
*Source: myFICO home mortgage rates (January 14, 2020)
As the chart above shows, the most affordable rates go to those with a credit score of 680 and above, with the best rates reserved for scores 760 and above. That isn’t to say you won’t be approved for a mortgage with a lower credit score, you’ll just pay more to borrow that money.
In fact, credit scores are not the biggest factor in determining whether banks approve a mortgage. A survey by The Fair Isaac Corporation (FICO) says that poor debt-to-income ratio (DTI) is the No. 1 reason mortgage applications are denied. Lenders want the ratio to be under 30%.
Is It a Good Time to Buy a Home?
Whether it’s a good time to buy a house depends on who you ask. Many economists, forecasting low, stable interest rates and only modest rises in housing prices, say, unequivocally, yes.
Others, citing tight inventory of affordable housing nationwide, throw up a caution flag.
If you ask regular folks, as government mortgage giant Fannie Mae does monthly, you find that right at 60% of us think now is a good time to buy (versus 32% who say it’s not).
That’s the macroeconomic, IMAX view. But buying a house is an intensely personal experience — in many ways, the ultimate microeconomic decision.
Whatever else is going on in the residential market space, whether it’s a good time for you to buy is dependent upon factors such as these:
- You have access to a substantial down payment (without exhausting your emergency fund).
- You are confident about the stability of your household income, not only to meet the payments, but also to take care of upkeep and weather financial surprises.
- Your credit score is in good shape.
- You can be happy for a number of years in the house and neighborhood you can afford.
Pros and Cons of the 30-Year Fixed Mortgage
If even scrumptious, irresistible apple pie à la mode has its downsides, so must America’s favorite mortgage. Let’s have a look at the good and the not-so-good.
Pros of a 30-Year Fixed Mortgage
- Low monthly payments: Assuming identical principle balances, a 30-year fixed-rate mortgage offers the lowest monthly payment among traditional fixed-rate loans.
- Flexibility with payments: The lower payment will allow you more flexibility if you run into financial trouble — a layoff or a prolonged illness, for instance. Or, if your household income grows, you will be in a position to make larger or extra payments, reducing the length of the mortgage and lowering the amount of total interest you pay. In other words, you can turn a 30-year mortgage into a 15-year mortgage simply by adding a few hundred dollars to monthly payments.
- Predictable payments each month: A lower predictable payment also means, when times are good, being able to fund other priorities like home maintenance, education, retirement saving, vacation planning, etc.
- Low rates are locked in for 30 years: If you are fortunate enough to get a lower mortgage rate, that rate is fixed for the life of the loan. Variable interest rates can change as the economic winds blow.
- More house: Because applicants qualify based on their ability to make payments, a 30-year fixed-rate loan allows you to pursue a more expensive house.
- Tax deduction for mortgage interest (maybe): Current tax laws still allow homeowners to deduct mortgage interest from their taxable income, and the 30-year fixed-rate mortgage involves the highest interest payments. However, the arrangement comes with a caveat. Once the linchpin for filers who itemize, the mortgage-interest deduction lost much of its allure with passage of tax reform in 2017, which — in a nod to simplification — included massive increases in the standard deduction. Consult a tax expert about whether your deduction will make itemizing worthwhile.
Cons of a 30-Year Fixed Mortgage
- Higher interest rate: The longer a lender’s risk of being repaid is stretched out (and the longer the lender’s money is tied up), the higher the interest rate tends to be; customarily, the difference between 15- and 30-year loans is about a half-point.
- More total interest paid: Again, assuming both loans are paid according to schedule and held for the duration of their terms, borrowers with 30-year mortgages pay far more interest — about 60% more — than those with 15-year loans.
- Sluggish growth in equity: Because a lion’s share of each payment during the first 10 years goes to interest, homeowners with 30-year mortgages build little home equity through their own efforts. (This is a minor consideration in traditional circumstances, when real estate tends to appreciate.)
- You may over-borrow: Because you can qualify for more house, you may be tempted to push your personal financial envelope. Maxing out may leave you ill-prepared for life’s surprise detours.
- More expensive upkeep: Other factors being equal, if you go for the pricier house, you’re likely to encounter — at minimum — a steeper property tax bill. If the pricier house isn’t simply in a more desirable location, but it’s larger, you’re looking at higher maintenance and, probably, utility costs.
- Not ideal for borrowers on the move: A better loan would be a 3-year or 7-year Adjustable Rate Mortgages (ARM), which has a variable interest rate with a lower introductory rate. Ideally, you would have sold the house by the time the variable rate rises past the alternative fixed rate.
30-Year Fixed Mortgage vs. 15-Year Fixed Mortgage
|30-year fixed||15-year fixed||15-year fixed|
|Total Interest Paid||$107,736||$39,997||$29.998|
(Mortgages include 1.25% property tax and $1,000/year homeowner’s insurance)
Take a look at the chart and one number should jump out at you: Total interest paid on a 30-year fixed mortgage is a lot.
By the end of the 30-year fixed loan, you’ll end up paying nearly 2.5 times what the original loan amount was and almost double the value of the home. By comparison, you’ll spend $120,000 more over 30 years than you would for a 15-year fixed mortgage.
What it really boils down to are the monthly payments. An extra $400 per month is a lot to swallow for a 15-year mortgage. You certainly don’t want to overextend yourself with a 15-year mortgage and struggle to make payments.
When comparing mortgage loans, you are really comparing houses. If you can afford the monthly payment for a $200,000 house on a 30-year fixed mortgage, you can also afford the monthly payment on a $150,000 house on a 15-year fixed mortgage. The homes have similar monthly payments. The difference is the price of the house: $200,000 for the 30-year and $150,000 for the 15-year.
Now, take a look at the savings. Assuming you make the standard 20% down payment, the 15-year $120,000 loan will save you over $77k in interest and nearly $180k overall.
Mortgage Comparison Calculator (15, 20, 30 years)
Dos and Don’ts When Looking for a Mortgage
Homeownership is a big responsibility, and you will want to make sure you are prepared to take on such a large debt. While you’re filling out the columns, consider these recommendations.
Dos When Looking for a Mortgage:
- Start by calculating how much you can afford each month.
- Consider how long you plan to stay in the house. You might have a job that requires you to move frequently.
- Do you plan to start a family? You should anticipate how much space you’ll need.
- Is the house near good schools?
- Can you reasonably expect the house to improve in value?
Don’ts When Looking for a Mortgage:
- Don’t borrow your limit on a 30-year mortgage. You might love the backyard or the walk-in closet, but that money could be used elsewhere. You’ll need to build an emergency fund should something bad happen. If the refrigerator breaks or you need to repair the roof, you need to have cash on hand to handle these kinds of problems. You should also have money to set aside for retirement savings.
- Don’t put less than 20% down. Otherwise, you’ll need private mortgage insurance (PMI) to protect the lender in a foreclosure. Plus, a 20% down payment keeps your monthly payments affordable.
The word mortgage literally translates to “death pledge”. Seems like a rather ominous word to associate with something you’ll “live” in, but no, that isn’t referring to mortgages as a suicide mission.
It actually means the pledge dies when you fulfill your obligation. A 30-year fixed mortgage is an awfully slow kill, but in the end, you’ll have a happy place to call your own.
About The Author
Max Fay has been writing about personal finance for Debt.org for the past five years. His expertise is in student loans, credit cards and mortgages. Max inherited a genetic predisposition to being tight with his money and free with financial advice. He was published in every major newspaper in Florida while working his way through Florida State University. He can be reached at [email protected].
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