What is a 30-year fixed rate mortgage?
A 30-year fixed-rate mortgage is a home loan structure that establishes an unchanging interest rate throughout the course of the loan. The interest rate charged on the outstanding principal balance does not change month to month, guaranteeing a stable payment plan.
Mortgage interest rates today are constantly fluctuating and providing new opportunities for prospective homebuyers to jump into the real estate market. When interest rates are low, demand for 30-year mortgages rates spikes. Homebuyers know that if they can strike while the iron is hot, they’ll secure financing for a new home at a low interest rate that will never change No matter how the economy or the real estate market evolves throughout the three decades of the loan’s term, the interest on fixed-rate mortgages remains steady.
Opting for this loan structure means that 30-year mortgage rates today will not change for the full term of the loan. While some other mortgage structures adapt to current interest rates, the amount of interest on a fixed mortgage won’t budge. This certainty allows you to plan for your financial future without the risk of unexpected economic conditions impacting your mortgage payments.
Since these payment plans are spread over three decades, the amount paid each month is less compared to other shorter-term mortgages. A 15-year fixed-rate mortgage, for example, gives you much less time to repay the loan. To make up for this shortened schedule, your monthly payments on a 15-year mortgage would be higher than if the plan was spread over 30 years.
Let’s take a closer look at interest and how it plays into 30-year mortgage rates.
30-year fixed-rate mortgages and interest
While researching 30-year fixed mortgage rates, you’ll notice that the loan’s interest weighs heavily on your borrowing limits and repayment minimums. Calculated as a percentage of the full mortgage loan, the interest rate outlines the annual cost of financing a home purchase. Charging interest on a loan is a lender’s way of ensuring returns by mitigating some of the uncertainty around issuing a mortgage while giving the lender a return on the money that was lent.
As is the case with all mortgage loans, your initial payments will be largely devoted towards paying the interest due on the outstanding principal balance. You shouldn’t expect to gain much equity in the home during your first few years living there. Lenders will usually recommend that borrowers opt for a 30-year mortgage only if they plan on staying in the home for a long period of time.
Living on the property for only five years or less may be long enough to pay the interest due on the outstanding principal balance, but the loan balance itself will not have made much progress. Since you haven’t paid off a significant amount of the principal, you haven’t gained much equity in the property. This means that selling the home after only five years likely won’t allow you to profit from your real estate investment.
Even though your first few years will largely be spent paying the interest due on the outstanding principal balance on the loan, you’ll gradually start to increase the amount paid towards the loan’s principal. During the latter half of your lending agreement, you’ll gain more equity with each monthly mortgage payment as the remaining balance on your loan dwindles.
Before applying for a 30-year fixed-rate mortgage you’ll need to decide how much interest you’re willing to pay. Interest on a 20-year mortgage, for example, is likely lower. This provides an opportunity to build equity at a faster pace while saving you thousands in interest once the loan is closed. However, monthly minimums on shorter-term loans are much higher, making 30-year mortgages much more affordable on a month to month basis.
What is the difference between interest rate and APR?
Another important figure you’ll come across while shopping for 30-year mortgage rates is the annual percentage rate or “APR.”
Not to be confused with interest, the APR is also expressed as a percentage of the overall loan amount. However, rather than signifying the annual cost of a mortgage, the APR outlines the amount to be paid each year in home loan expenses, factoring in the loan’s cost at the time of closing plus what you’ve paid in interest over the life of the mortgage.
Developed as a way to provide accurate and transparent mortgage information to buyers, the APR lays out where your scheduled payments are going and allows consumers to compare loan scenarios from various lenders and understand who is really offering the best deal.
A home sale’s closing costs, mortgage insurance and loan origination fees all factor into the APR, providing the buyer with an overview of what they are paying month after month. As a part of the Federal Truth in Lending Act, lenders must disclose accurate APRs before the loan is finalized. This gives prospective buyers a solid basis for comparing their home buying options. For a better look at how your 30-year mortgage will be paid off over time, your lender will provide an amortization schedule.
What is an amortization schedule?
A major advantage of a 30-year fixed mortgage is the security in knowing exactly how much you’ll be paying each month. The ability to predict your largest expense for up to the next 30 years provides a huge advantage in financial planning. Not only can you accurately predict the amount going towards your mortgage, but you’ll also know how much you’ll have left over to contribute towards other investments and savings accounts.
This predictability allows lenders to build a repayment plan known as an amortization schedule. Amortization refers to the process of steadily paying off a debt through regular payments over a period of time. For a fixed-rate mortgage, building an amortization schedule is much simpler thanks to the locked-in interest rate and monthly minimum.
Here’s an example of what an amortization schedule looks like from investinganswers.com:
The amortization schedule, provided by the lender when shopping for a loan, projects your monthly payments throughout the term of the mortgage. This chart also gives a precise estimate of how much equity you’ll have gained in a given month. With this knowledge, you can get a head start on your long-term financial goals and prioritize savings years in advance.
Amortization schedules are a great resource when taking out a fixed-rate loan, but become much more complicated when applying for an adjustable rate mortgage.
What’s the difference between fixed-rate and adjustable rate mortgages?
Unlike a 30-year fixed-rate mortgage, adjustable rate mortgages (ARMs) come with a fluctuating interest rate that rises or lowers along with market conditions.
Minimum monthly payments on these loans depend on external factors, and opting for this mortgage type is usually seen as a greater risk. When mortgage interest rates go up, so do the monthly payments on an ARM.
Homeowners can’t control the economy or shift the real estate market. If you apply for an ARM and these factors turn against your favor, you could end up paying thousands more in added interest after the ARM expires.
This also makes it difficult to predict how much money you’ll have for other expenses down the line. If the amount of interest suddenly spikes after your 5-year or 7-year ARM adjusts, you’ll have to adjust your finances. This makes ARMs a much more volatile lending option than 30-year fixed-rate mortgages.
The major advantage of an adjustable rate mortgage is that you could end up saving money over time. The initial interest rates on these loans are typically lower than their fixed-rate counterparts. If the mortgage rates continue to dip after the fixed rate period on your ARM expires and your rate adjusts, your rate could decrease even further, lowering your monthly mortgage payments.
Again, this depends entirely on the state of the economy and market trends. In addition to paying a steady rate of interest, 30-year fixed-rate mortgages offer a number of financial advantages.
Historical 30-year rates
To get the best rate on a 30-year fixed mortgage, you’ll need to apply when interest rates are low. Here’s a look at 30-year mortgage from previous years to give you an idea of the market’s trajectory:
30-year fixed mortgages vs. other mortgage types
30-year fixed rate mortgages are a popular form of financing, but there are other mortgage opportunities at your disposal. Here’s a look at some alternative mortgage structures and how they might compliment your home buying needs.
- 15-year fixed conforming mortgage
- 5-year ARM conforming mortgage
- 7-year ARM conforming mortgage
- Jumbo mortgage
- FHA conforming mortgage
- VA conforming mortgage
- Interest only mortgage
How do I get the best 30-year rate?
To get the best 30-year rate possible, you’ll need to determine how big of a loan you can afford. Follow these steps to get started on finding your ideal home:
- Build your credit over time
- Start saving for a down payment
- Keep an eye on interest rates
- Calculate your potential mortgage payments
- Meet with lenders and ask questions
Benefits of 30-year fixed-rate mortgages
As one of the most popular home financing options, 30-year fixed-rate mortgages present an array of benefits that other loan structures can’t offer. Let’s take a look at the four major advantages and how they might help you achieve your financial goals:
- Fixed interest rate
- Lower monthly payments
- Flexible payment limits
- Ability to borrow more
Fixed interest rate
Even in the face of drastic economic changes, the amount you pay each month is set in stone. This gives you a clearer picture of your finances from month to month. As we said above, ARM loans do not provide the same protection.
Lower mortgage payments
Another major benefit of taking out a 30-year fixed-rate mortgage is the long repayment plan. Stretching out a mortgage over three decades brings down the monthly principal and interest payment you’ll be making, leaving room for other savings plans and investments.
Shorter term loans, such as 10 or 15-year fixed-rate mortgages leave the borrower with much less time to pay their lender back. This leads to much higher payments, which could hinder other savings plans.
Flexible payment limits
After glancing at your amortization schedule, you’ll see that 30-year fixed mortgages come with required minimums that you’ll need to pay each month. However, this is only a minimum, and you do have the option to pay more.
Once you’ve settled into the rhythm of your monthly payments, you might find yourself with a few dollars left over. This extra cash can go towards your mortgage and help you pay off interest or gain equity at a much faster rate.
Paying more than your required payment is usually recommended for homeowners who plan to keep the property for a long period of time. This strategy could shrink your repayment plan from 30 years to 25. However, if you’re only staying in the home for 10 years, you will not have significantly reduced the loan’s principal and you won't reap the benefits of making those higher payments.
Making lower monthly payments means you might be able to afford more house than you would get with a 20- or 10-year loan. Not only do 30-year fixed-rate mortgages cost less month over month, but their long term structure also allows you to borrow more.
This means that applying for a 30-year mortgage will open up more options in the housing market and provide a broader array of properties to choose from.
Disadvantages of 30-year fixed-rate mortgage
30-year fixed-rate mortgages might sound like a great option, but before you send an application, let’s discuss some of the drawbacks to this loan structure:
- Higher Interest
- Long-term living
Higher interest rates
Throughout the 30 years of the mortgages’s term, you’ll pay a substantial amount in interest. Monthly payments might be the most affordable for 30-year loans, but the amount you pay in interest is nearly twice as much as it would be for a 15-year structure.
This means that building any equity in the property takes a considerable amount of time, usually more than 10 years.
A fixed-rate mortgage also means you won't benefit from a downturn in market interest rates. While homeowners who may have opted for an adjustable rate mortgage see their monthly minimums decrease, yours will always stay the same.
To take full advantage of the benefits 30-year fixed-rate mortgages offer, you’ll need to live in the home for a long time. After only 10 years, you will not have had enough time to build much equity in the property and you’ll miss out on the financial benefits of homeownership.
That’s why lenders will usually recommend 30-year mortgages to buyers who are looking to keep the home for a very long time.
Guaranteed Rate’s 30-Year Mortgage
If the 30-year fixed-rate structure sounds like the financing solution you’re looking for, you can get started by applying for a mortgage today.
- Sample payment does not include taxes, insurance or assessments. Mortgage Insurance Premium (MIP) is required for all FHA loans and Private Mortgage Insurance (PMI) is required for all conventional loans where the LTV is greater than 80%.
- Mortgage interest rates shown are based on a 60-day rate lock period.
- The displayed Annual Percentage Rate (APR) is a measure of the cost to borrow money expressed as a yearly percentage. For mortgage loans, excluding home equity lines of credit, it includes the interest rate plus other charges or fees (such as mortgage insurance, discount points, and origination fees). For home equity lines, the APR simply reflects the interest rate. When shopping for a mortgage, you can use the APR to compare the costs of similar loans between lenders.
- The estimated total closing costs above do not constitute and are not a substitute for a loan estimate, which includes an estimate of closing costs, than you will receive once you apply for a loan. The amounts provided above for Estimated Total Closing Costs, are estimations based on the state selected. This is NOT a mortgage loan approval or commitment to lend. The actual fees, costs and monthly payment on your specific loan transaction may vary, and may include city, county or other additional fees and costs.
- These mortgage rates are based upon a variety of assumptions and conditions which include a consumer credit score which may be higher or lower than your individual credit score. Your loan's interest rate will depend upon the specific characteristics of your loan transaction and your credit history up to the time of closing.
Sample scenario assumes 180 monthly (30-YR fixed rate mortgage) Principal and Interest (P&I) payment of $1,633 and is based on a purchase price of $500,000 down payment of 20%, and rate of 2.75%/2.78% APR (annual percentage rate). Advertised rates and APR effective as of 01/26/21 and are subject to change. Above scenario assumes a first lien position, 740 FICO score, 60 day rate lock on a Single-Family Residence in Illinois and are subject to change without notice. Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Restrictions may apply, contact Guaranteed Rate for current rates and for more information. All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Guaranteed Rate, Inc. does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Guaranteed Rate, Inc. Guaranteed Rate, Inc. its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.