Weighing the pros and cons of the 30-year fixed mortgage


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Ask a Lender
October 27, 2015 | Updated September 21, 2017


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Key Points

Home-loan terms

  • The 30-year fixed loan is the most popular home loan.
  • It offers borrowers lower monthly payments and the security of a set interest rate.
  • Longer-term loans carry more risks for lenders and overall are more expensive than shorter-term mortgages.
  • Borrowers with shorter-term loans save on interest payments and can build up equity faster.

It is not too hard to figure out why the 30-year fixed mortgage is easily the most popular home loan around.

First and foremost, the monthly payments are lower. The loan amortizes over 30 years, which is a fancy way of saying the mortgaged amount gradually pays off at the end of that 30-year period. That spreads the payments over a much longer time frame than 15-year or shorter-term loans.

A lower monthly payment makes it possible for less affluent borrowers, including younger and first-time homebuyers, to afford a house. It also means that a homebuyer can potentially afford to take out a larger loan than they could otherwise afford with a shorter-term mortgage. 

Also, the interest rate on a 30-year fixed loan will never vary. In the mortgage business, the 30-year fixed is known as a plain, vanilla mortgage for a reason. The terms are easy to understand. The fixed rate gives borrowers a sense of comfort and stability for decades into the future.

Finally, for several years, mortgage rates were historically low, giving borrowers little incentive to take out loans at shorter terms. In other words, why go with a short-term loan with a higher monthly payment, when you can lock into a fixed rate for 30 years at under 4 percent interest? Low rates have made 30-year fixed mortgages more affordable.

Higher interest payments

Most good things, however, have a downside, and that also applies to 30-year fixed mortgages.

The most obvious drawback to a 30-year fixed mortgage is overall cost. It is true that a borrower will pay less each month to remain current on the loan, but a 30-year term loan itself costs the borrower much more in the long run.

The borrower pays significantly more in interest payments over the life of the loan. The borrower is paying interest on the lump sum mortgaged amount, which takes much longer to pay down over a 30-year period, compared with a shorter term. A 30-year fixed mortgage also typically carries a higher interest rate than a 15-year mortgage or shorter-term mortgage. That’s because a 30-year fixed mortgage is considered more risky to the lender or the investor that ultimately purchases the mortgage.

Thirty years is a long time for a lender to gamble that a borrower will make regular monthly payments. The person may get sick or lose a job, events that could mean they’ll default one day. This risk is passed onto the borrower in the form of a higher interest rate.

Shorter-term loans build equity

Another issue with a 30-year fixed mortgage is that it takes decades to repay. Many borrowers can afford shorter-term mortgages, and it may make financial sense for them to consider a shorter-term mortgage.

By taking out a shorter-term loan, borrowers can pay down the principal and get free and clear ownership of the home much more quickly. The borrowers also can build up equity much faster, giving them a nice lump sum to put down on another house if they sell their current home. They also can draw on their money through a home equity line of credit to use for home renovations or other purposes. The bottom line is that the borrower with a shorter-term mortgage is paying less money to service interest payments that do nothing to build value for a homeowner.

Finally, some borrowers do not need the security of a 30-year fixed mortgage. According to studies, many homeowners refinance or sell their homes within a decade of buying them. If they aren’t planning on sticking with the loan for 30 years, the only benefit they’ll gain is the lower monthly payment, which comes at a price. 

The 30-year fixed mortgage is a good product. That’s why it is the most popular loan in America, but it isn’t necessarily the best loan for everyone.


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