30-Year Fixed-Rate Mortgage

What is a 30-year fixed-rate mortgage?

A 30-year fixed-rate mortgage is a home loan that is structured to provide an unchanging interest rate and fixed monthly payments over the loan term.

Opting for this loan structure means the rate will not change for the life of the loan. This especially appeals to renters who face annual rent hikes as inflation and the cost of living increases.

Because it is the most popular loan purchased by mortgage investors, a 30-year fixed-rate loan offers some of the lowest rates and provides the perk of a fixed monthly payment. While some other mortgage loan structures adapt to current interest rates (like an adjustable-rate mortgage), the amount of interest on a fixed-rate mortgage won’t budge. The 30-year fixed-rate loan is the standard option for all traditional financing options, including conventional, FHA, VA, and jumbo financing.

Conventional vs. Conforming

While a 30-year fixed-rate mortgage option is available with almost every single loan product we offer, in this article we are focusing on the specifics of conventional, conforming 30-year fixed mortgage loans. Most people in the real estate and mortgage industries use the term “30-year fixed mortgage” to refer to conventional, conforming loans because these are the most common loans used by buyers, and because their lending guidelines are mostly a consistent standard.

The terms conventional and conforming refer to loans that are purchased by the Federal National Mortgage Association (FNMA, pronounced as and referred to as Fannie Mae, or just Fannie) and the Federal Home Loan Mortgage Corporation (FHLMC, pronounced as and referred to as Freddie Mac, or just Freddie). Despite having “Federal” in their titles, Fannie Mae and Freddie Mac are private companies that account for 70% of all mortgage loans in 2023 alone. This is why, in the mortgage world, their 30-year fixed-rate mortgages are considered the standard.

Finally, because FNMA and FHLMC are technically private companies, we refer to the loans they purchase as “conventional“, or loans not directly funded or purchased by the federal government. In addition, FNMA and FHLMC have strict limits on the size of the loans they will purchase; loans that are within that limit are called “conforming“. Hence, we arrive at the commonly used term mortgage term: conventional, conforming 30-year fixed-rate mortgage. We are going to shorten that up to just a “30-year fixed rate mortgage” for the rest of the article.

Is a 30-year fixed-rate loan better than a 15-year fixed-rate loan?

With a shorter loan period, buyers pay less in overall interest over the life of a 15-year fixed-rate loan compared to a 30-year fixed-rate option. However, the lower monthly cost that comes with the 30-year fixed-rate mortgage allows for more liquidity and less risk should any unexpected economic conditions impact your mortgage payments.

Comparing Payments for 30-Year vs. 15-Year Fixed-Rate Mortgages

For example, assuming a 6% mortgage rate and a $500,000 loan amount, the payment on a 30-year mortgage is $2,998/mo; on a 15-year mortgage, it is $4,219/mo. That extra $1,221/mo is a more than 30% increase in payment on a 15-year loan compared to a 30-year loan, which can strain the monthly budget.

It is also worth considering that on average, people do not keep their mortgages for more than 7 years because of refinance opportunities or life changes that cause them to sell their homes. So, comparing the interest saved over the full loan term may be less realistic given how quickly market conditions and life circumstances can change.

Finally, while we are not financial advisors, we do recommend that buyers consider the power of investing their savings to get compounding interest working in their favor. Using the above example, if someone were to invest the $1,221/mo they saved by choosing a 30-year fixed mortgage over a 15-year fixed mortgage, they would have about ~$462,000 after 15 years. This assumes a 9% rate of return from the stock market (the S&P 500 has averaged ~10% over the last 30 years).

That would be enough money to pay off the $355k balance remaining on their loan after 15 years and still walk away with $110,000.

So, if you still are conflicted between 30-year and 15-year fixed-rate loan options, we recommend defaulting to a 30-year fixed-rate – and making additional monthly payments whenever you prefer. All additional payments go directly towards reducing your principal loan balance, and you can prepay your mortgage early with zero penalty at any time.

What are interest rates for a 30-year fixed-rate mortgage?

30-year fixed-rate loans have some of the lowest and most competitive rates available today. Because these loans are extremely common and have low rates of default, they are considered relatively safe and lower-risk options for investors and companies looking to purchase mortgages in the secondary mortgage market (companies like Fannie Mae and Freddie Mac, explained above).

The rule for interest rates is that the lower the risk to investors, the lower the interest rate someone can secure, but when you zoom out to the program level, 3 programs are generally considered lower risk and therefore offer lower rates than 30-year fixed-rate mortgages. These are:

15-Year Fixed-Rate Mortgages

These loans have shorter terms, so investors consider them to be lower risk because they get paid back faster. However, as described above, it is worth considering the trade-off between the slightly lower rate and the much higher mortgage payment.

Adjustable Rate Mortgages

These loans only secure your rate for a fixed number of years (usually between 5 and 10 years) and then begin adjusting up or down with the market interest rates. In typical markets, investors consider this to be a lower-risk loan to them, since they are sharing the interest rate risk of markets changing with the borrower, so they will offer a lower starting interest rate.

Jumbo Loans

These are mortgages for loan sizes that exceed “conforming” limits from Fannie and Freddie. So, while the large size of these loans can be considered more “risky”, the underwriting guidelines are far more stringent. This means only the most well-qualified buyers are approved for these loans, so the loans are generally considered lower risk to investors despite their size.

Markets and investors’ appetite for risk fluctuates daily (much like things fluctuate in the stock market). But, in general, 30-year fixed-rate mortgages have some of the lowest rates available.

What are the advantages of a 30-year fixed-rate mortgage?

One of the most significant advantages of a 30-year fixed-rate mortgage is having a predictable monthly payment and more financial stability, as your payments will remain the same over the life of the loan. Having the ability to predict your largest recurring expense for the next few decades provides a huge advantage in financial planning.

Your monthly payments are divided between the principal loan amount and calculated interest. As you pay down your loan balance, more and more of your monthly payment is allocated towards paying down the loan’s principal balance vs. interest.

Our amortization calculator shows how your monthly payment allotment changes over the 30-year loan term.

What’s the difference between fixed-rate and adjustable-rate mortgages?

Unlike a 30-year fixed-rate mortgage, adjustable-rate mortgages (ARMs) have an interest rate that is only fixed for a few years and then fluctuates up or down depending on market conditions.

Because of the unpredictability of interest rates and the dependency on the current market, ARMs are a riskier option for borrowers. If interest rates rise significantly, your monthly payment has the potential to exceed what you are comfortable paying. Conversely, if rates were to go down, your payment would decrease down to a minimum “floor” amount.

Because you as the borrower are taking on more risk with the future adjustment periods, investors are exposed to less risk. Therefore, adjustable-rate mortgages will typically come with a lower initial interest rate.

Pros of a 30-Year Fixed-Rate Mortgage

Hedge Against Inflation

Fixed monthly payments protect you against cost-of-living increases and inflation. As inflation raises rents and incomes, having a fixed, low monthly payment with a 30-year loan will feel even more affordable over time.

Fixed monthly payments also provide added security, predictability, and peace of mind that your payment won’t increase when interest rates start to rise.

Low Monthly Payment

The 30-year loan term allows for the longest amortization period. This keeps monthly payments low since the loan payments are stretched over the next 30 years. This lower payment allows more flexibility and stability to budget for the future.

As your income rises over time, you will have more discretionary income for other endeavors, such as saving for retirement, a college fund, or a family vacation.

Maximum Purchasing Power

Underwriting guidelines limit the amount of your monthly income that can be spent on your new housing expenses. So, opting for a loan with lower monthly payments allows you to qualify for a higher purchase price by keeping your housing payment ratio low. This can be the advantage you need to win potential bidding wars, buy a bigger home, or move into a more desirable neighborhood.

Cons of a 30-Year Fixed-Rate Mortgage

Slightly Higher Interest Rates

30-year fixed-rate loans will have slightly higher interest rates than some other alternatives, such as 15-year fixed-rate loans, adjustable-rate loans, and jumbo loans. By choosing the lower monthly payment and stability of a 30-year fixed rate, buyers are sacrificing these additional interest savings.

Slower Equity Growth

With longer loan terms, it will take you more time to accrue equity in your home. If your overall goal is a fast track to free and clear homeownership, a shorter loan term may be the best choice for you.

Mortgage Insurance – What is it, and when is it required?

Mortgage insurance (MI) is an insurance policy that protects the lender in case of a borrower’s default. MI is required in one form or another anytime someone buys with less than a 20% down payment. Although mortgage insurance increases a buyer’s costs, the option of mortgage insurance has allowed millions to start benefiting from home value appreciation much earlier than ever before, which increases their net worth in the long run.  Mortgage insurance also increases home accessibility to buyers who cannot afford to save for a 20% down payment, or whose savings would continually fall short of the 20% as home values climb.

Conventional loans have Private Mortgage Insurance (or PMI) that will cancel over time. Government loans, such as FHA financing, have mandatory mortgage insurance that can be required for the life of the loan and contain both an upfront mortgage insurance premium and a monthly mortgage insurance premium. VA and USDA loans don’t have mortgage insurance but do have funding fees and guarantee fees that function very similarly.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is required for all conventional loans with a down payment of less than 20%. You can opt to pay this monthly (most popular), in a lump sum at closing, or finance the lump sum payment into the loan (which results in the lowest monthly payment). The cost for PMI varies depending on multiple variables, which primarily include your credit score, down payment, and loan term.

Once you accrue 20% equity in your home, you can petition to have this monthly payment removed from your loan, often by ordering an appraisal to confirm the value of your home. Otherwise, mortgage insurance is automatically removed once you accrue 22% equity in your home, based on the original purchase price.

Down Payment Options

With 30-year fixed-rate loans, homebuyers can take advantage of the most lenient minimum down payment requirements for each financing type listed below:

Conventional:

• 3% minimum for low-balance loans (loan amounts below the 2023 limit of $726,200)
• 5% minimum for high-balance loans (loan amounts in high-cost counties above the 2023 limit of $726,200 and below $1,089,300)

FHA:

• 3.5% minimum

VA:

• 0% minimum

Jumbo:

• 10% minimum 

Is a 30-year fixed-rate mortgage right for you?

There is no one-size-fits-all for mortgage financing. The best way to determine whether a 30-year fixed-rate mortgage makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.