At a glance: The primary advantage of a 30-year fixed-rate mortgage is payment stability and predictability, since the interest rate stays the same. The primary disadvantage is that you’ll probably end up with a higher mortgage rate, so you might pay more interest over the long term.
Did you know that the 30-year fixed-rate mortgage loan is the most popular loan option among home buyers these days? It’s true. The standard 30-year mortgage is more commonly used than all of the other lending options out there. But why is it so popular? What are the benefits? And are there any drawbacks?
This article looks at the potential advantages and disadvantages of using a 30-year fixed-rate mortgage when buying a home.
What Is a 30-Year Fixed-Rate Mortgage?
As you probably already know, this type of home loan has a fixed rate of interest that does not change, along with a repayment length or “term” of 30 years. As mentioned, it is by far the most commonly used of all the different loan options.
The fixed interest rate is one of the most important features of this particular loan, and it’s also one of the primary advantages of the 30-year fixed mortgage. When you use this particular product to finance a home purchase, you’ll have the same mortgage rate for the full 30-year term (or until you sell or refinance the home).
This feature distinguishes the 30-year fixed-rate mortgage loan from other financing options that have a changing or “adjustable” rate.
In fact, this is one of the first choices you’ll make when choosing a type of home loan: Do you want a fixed or adjustable mortgage rate?
With that definition out of the way, let’s examine the advantages and disadvantages of a 30-year fixed-rate mortgage. Starting with the potential advantages and benefits…
Advantages of the 30-Year Mortgage Option
The 30-year fixed home loan is the most popular mortgage financing option for a reason. Here are the primary advantages that attract borrowers to this particular product.
Payment stability: The interest rate is one of the key components of a monthly mortgage payment. It’s the first ‘I’ in the acronym PITI (along with principal, taxes, and insurance). Having a fixed or unchanging mortgage rate means that your monthly payments should stay the same as well. Long-term payment stability and predictability is arguably the #1 advantage of a 30-year fixed-rate mortgage loan.
No surprises: Adjustable-rate mortgage (ARM) loans have an interest rate that can change every year. This opens the door for potentially unpleasant surprises. Your loan can actually get more expensive over time. But that’s not the case with a fixed-rate mortgage loan. The advantage of using a “fixed” option is that the interest rate will stay the same for as long as you keep the loan. So there shouldn’t be any unpleasant surprises down the road. The rate you receive up front is the one you’ll keep for the full 30-year term.
Low monthly payment: Another key benefit to using a 30-year fixed-rate mortgage loan is that you could end up with a smaller monthly payment, compared to a loan with a shorter repayment term. This is the result of simple math. By spreading the payments out over a longer period of time, you are effectively reducing the size of your monthly payments. (Of course, there’s a downside to this as well. You might end up paying interest over a longer period of time. More to follow on this.)
Potential Disadvantages to Consider
We’ve covered the advantages of using a 30-year fixed-rate mortgage loan. But there are some potential downsides as well. Let’s shift gears and look at the disadvantages of this popular, go-to mortgage option.
The primary disadvantage of the 30-year fixed mortgage is that you’ll probably end up with a higher interest rate (compared to a loan with a shorter term, or an adjustable mortgage). That’s the price you pay for the long-term stability mentioned earlier. On average, the mortgage rates assigned to 30-year loans tend to be higher than those with shorter terms.
For instance, here’s a snapshot of averages rates at the time this article was published (February 2017). These averages are based on the weekly mortgage industry survey conducted by Freddie Mac. Don’t focus on the exact numbers here, as those will have changed by the time you read this. Instead, notice the difference between the average rates. As you can see, the standard 30-year fixed mortgage is the most expensive in terms of interest.
Another potential disadvantage of the 30-year fixed-rate mortgage is that you could end up paying interest over a longer period of time. This will increase the total cost of your loan, when compared to a shorter-term mortgage like the 15-year fixed.
Of course, many people who use 30-year home loans end up selling or refinancing long before the term expires. So this might not be a major drawback in all scenarios. It depends on your situation.
As you can see, there is a trade-off here. Like all mortgage options, the 30-year fixed-rate loan has certain pros and cons to consider. Your monthly payments might be smaller, and they’ll probably never change. But you could end up paying significantly more interest over the long term, especially if you keep the loan for many years.
Takeaway: Consider the advantages and disadvantages of the 30-year fixed-rate mortgage, as they relate to your plans and priorities, and make an informed decision.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author