What Is A 30-Year Fixed Mortgage?

Any home purchase comes with several decisions, and one of the most important you’ll make is on the type of mortgage you use to buy your dream property.

Don’t be surprised if researching home loans leads you to a 30-year fixed-rate mortgage, because this is the most popular home loan. But what is a 30-year mortgage exactly, how does it work and what are the pros and cons of this mortgage option?

Let’s answer these questions and more below.

A 30-year fixed-rate home loan is a mortgage that will be completely paid off in 30 years if the homeowner makes all the payments as scheduled. With a fixed-rate loan, the interest rate remains the same for the entire span of the mortgage.

In most cases, a 30-year fixed-rate mortgage is a conventional loan. Conventional loans don’t receive backing from the government, but it’s possible to get a 30-year fixed FHA, USDA or VA loan, which the government does insure. Rocket Mortgage^® doesn’t offer USDA loans at this time, however.

Below are the current rates offered by Rocket Mortgage for different mortgage products. You’ll also find our mortgage refinance rates here.

Your 30-year fixed mortgage includes several components. Learning about each one can help you better estimate the total cost of your potential monthly payments.

• Principal: The principal is the original amount you borrow from a lender to purchase your home. So, if you buy a $300,000 home, make a 20% down payment of $60,000 and borrow the remaining amount, your principal would be $240,000.

• Interest: Interest essentially acts as a fee the lender charges for letting you borrow money. Lenders calculate mortgage interest as a percentage of your principal. This rate may be variable or fixed, and most of your loan payment goes toward it early on in the loan term.

• Escrow: Escrow is money put aside that a third party uses to pay costs on your behalf. Property taxes and homeowners insurance are the primary expenses handled through an escrow account.

• Mortgage insurance: Mortgage insurance costs can depend on a few factors, including your loan type, loan amount, credit score and down payment, although not all factors apply to all mortgages. For example, with a conventional loan, you can avoid paying for private mortgage insurance (PMI) by making a down payment of at least 20%, but this down payment won’t waive mortgage insurance on an FHA loan.

Several factors determine your mortgage rate and can impact the amount you’ll pay. They include:

• Credit score: Lenders use your credit score to help determine whether it’s likely you can afford to make monthly mortgage payments. The credit score you’ll need to buy a house will largely depend on your lender and the type of mortgage you’re pursuing.

• Down payment: Lenders usually offer a slightly lower interest rate to buyers with a larger down payment, resulting in a lower loan-to-value ratio. A higher down payment will mean lower monthly payments throughout your repayment term.

• Location: Interest rates may vary somewhat based on state laws and regulations in the area where your home is located.

• Loan type: Certain loans come with a more competitive interest rate than others. For example, VA loan rates are often lower than conventional loan rates.

Mortgage interest rates fluctuate all the time based on market activity. A fixed-rate mortgage means your rate is locked in for the life of the loan, as opposed to an adjustable-rate mortgage where your rate rises or falls with the market.

The interest rates on 30-year fixed-rate mortgages change frequently. A few factors influence those changes, including:

• The federal funds rate: The Federal Reserve decides the federal funds rate, which is the rate financial institutions pay to borrow money.

• The financial markets: When financial markets are down, mortgage rates tend to be lower. The opposite is also true. When financial markets are up (especially if there’s a rise in inflation), rates tend to jump.

Don’t panic if interest rates increase in the time between when you start looking for a house and when you contact a lender. A slightly higher rate won’t significantly impact your monthly payments.

You’ll also want to consider the other terms and services a lender offers. You might find a lender that offers a relatively low rate but that doesn’t provide enough support or other favorable terms.

Several types of home loans may be available to you, and each comes with pros and cons. Finding the right type of financing will help you better afford the home you want.

Here are some types of mortgages you might consider.

Conventional 30-Year Fixed-Rate Mortgage

Conventional loans are split into two categories: conforming and nonconforming loans. Conventional conforming loans meet the regulations for sale to Freddie Mac or Fannie Mae. Conventional nonconforming loans, on the other hand, don’t satisfy these guidelines.

Because of the diversity of rules, conventional loans don’t have a set list of qualification requirements. However, they usually have stricter rules than government-backed loans, such as FHA loans. Typically, you need a minimum credit score of 620 and debt-to-income ratio (DTI) of 50% or lower.

Conventional loan interest rates vary daily, but they’re usually slightly higher than rates on VA, FHA and USDA loans, which, again, are all government-insured.

FHA 30-Year Fixed-Rate Mortgage

The Federal Housing Administration, which works under the Department of Housing and Urban Development (HUD), guarantees FHA loans. So, the FHA protects the owners of your mortgage in case you default on the loan.

With some lenders, you can qualify for an FHA loan with a down payment as small as 3.5% and a credit score as low as 580. Your lender may also want evidence of steady employment and a debt-to-income ratio below 50%. While FHA loans tend to be fairly accessible, you’ll have to pay a mortgage insurance premium (MIP) if you finance your home purchase with an FHA mortgage.

VA 30-Year Fixed-Rate Mortgage

A VA loan is backed by the Department of Veterans Affairs (VA), so it poses less risk to mortgage investors. You’ll need a VA Certificate of Eligibility (COE) proving you qualify, though. Active-duty military members, veterans, surviving military spouses, and members of the National Guard and Army Reserve are all eligible if they meet certain requirements.

VA loans have generally lenient borrowing terms (including credit requirements), low interest rates and no minimum down payment requirement. Borrowers also don’t have to pay mortgage insurance. However, keep in mind that VA terms and rates vary among lenders.

Jumbo 30-Year Fixed-Rate Mortgage

Jumbo mortgages are non-conforming loans, meaning they can exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA) and not conform to the guidelines of Fannie Mae and Freddie Mac.

A conforming 30-year fixed mortgage can only offer a loan amount within the conforming loan limits. A 30-year fixed jumbo loan, however, can offer you more money if you’re able to qualify. Before approving a jumbo loan, a lender may require a home buyer to have additional cash reserves. 

Just as every other type of home loan has benefits and drawbacks, so does the 30-year fixed-rate mortgage.

Take a look below at the breakdown of pros and cons that come along with this loan program.

Pros Of A 30-Year Fixed-Rate Mortgage

Home buyers tend to prefer 30-year fixed-rate mortgages. Here are some of the advantages they provide:

• Lower monthly payments: A 30-year mortgage spreads out the cost of your home over the 30-year term, giving you additional time to pay the loan back. As a result, you make a lower monthly payment than you would with a 15-year or 20-year mortgage for the same property.

• Flexibility: Some lenders allow you to make extra principal-only payments every month, helping you save money in the long run by reducing the amount you pay in interest. Not every lender handles extra payments the same, however, so it’s possible you could be subject to a penalty if you end up paying off your mortgage early. Rocket Mortgage doesn’t charge any penalties for prepayment, so look for similar opportunities with your loan.

• The ability to afford a more expensive home: When you choose a 30-year term loan, you may be able to purchase a more expensive home since spreading your mortgage payments out over the maximum number of years affects your debt-to-income ratio. For example, a lender may allow someone with a 15-year term to borrow $140,000. But someone borrowing on a 30-year term may be able to borrow $300,000. This is because, with a 30-year loan, a smaller portion of your monthly income has to go toward paying your mortgage.

Cons Of A 30-Year Fixed-Rate Mortgage

A 30-year fixed-rate mortgage promises some advantages for homeowners, but this loan might not be the best choice for everyone. Consider the following drawbacks:

• Paying more in interest: A 30-year mortgage will likely come with a higher interest rate than a shorter-term loan. That’s because it takes longer for a lender to be reimbursed the loan. Lenders charge a slightly higher interest rate to help minimize any potential loss from unexpected inflation during the loan term.

• Needing longer to pay off the loan: A 30-year mortgage is the longest mortgage term that most lenders offer. That draws out your repayment period, meaning you’ll pay more in interest than you would with a shorter loan term.

• Needing longer to build equity: As you pay the principal part of your mortgage, you slowly gain more ownership of your home. This ownership is known as equity, which is your home’s value minus the money you still owe your lender. However, it takes a longer time to build equity with a 30-year fixed-rate mortgage. This is because you aren’t paying as much toward your principal balance.

Historical mortgage rates for 30-year fixed mortgages have fluctuated significantly.

Rising Inflation Meant Higher Rates

The 1970s, to start, brought about consistent interest rate increases due to high inflation. In response, the Federal Reserve raised the federal funds rate, and this process repeated until it resulted in a 30-year interest rate of 18.63% on the week of October 9, 1981.

This remains the highest weekly mortgage rate ever recorded. By increasing the funds rate, the Federal Reserve slowly curbed inflation, and inflation levels remained normal through the ‘90s and early 2000s, during which mortgage rates stayed for the most part below 10%.

Less Demand Created Lower Rates

Eventually, the housing crisis struck in 2008, and average 30-year mortgage rates declined over several years until they hit a then-all-time low of 3.31%. Throughout the 2010s, demand for homes was weak and both interest rates and home prices remained low. Those who did buy a home were able to take advantage of the low sale prices and low rates, locking in affordable monthly payments.

Another major decline in rates occurred in 2020 with the COVID-19 pandemic. At the time, the Federal Reserve cut the federal funds rate down to 0%. Meanwhile, according to Freddie Mac, 30-year fixed-rate mortgages fell to a new record low of 2.65% in January 2021.

Since late 2021, mortgage rates have increased.

If you already have a 30-year fixed-rate mortgage, you may want to refinance your mortgage at some point for one or more of the reasons described next.

To Lower Your Monthly Payments

For instance, if you think your mortgage payments are too high or you’re struggling with repayment, you could refinance the loan into a new 30-year mortgage. This might lower your minimum monthly payment amount because you’ll have more time to pay off the loan.

However, keep in mind that refinancing into another 30-year loan will likely increase the amount of interest you’ll pay on your mortgage over time.

To Lower Your Interest Rate

You also might want to refinance if current interest rates are lower than when you purchased your home. Refinancing to a lower rate can save you money each month. However, you should ensure you’ll qualify for a lower interest rate before starting the refinance process.

To Access Your Equity

Another reason some homeowners refinance is to cash out part of the equity in their home. With significant equity, typically 20% or more, you can consider what’s called a cash-out refinance. This provides you with a sum of money you can use for home renovations, investing or other purposes.

Keep in mind, you’ll want to make sure the interest rates work in your favor. This means understanding the factors that influence the types of rates you can expect to pay. Such factors include your home’s price and location, your credit score and debt-to-income ratio and the average market interest rates.

As popular as 30-year fixed-rate mortgages are, they’re not the perfect fit for every home buyer.

If you’re looking for a way to keep your mortgage payments as small as possible and don’t mind paying more interest over the long haul, a 30-year fixed mortgage may be ideal. However, if you want to pay your mortgage off quickly or want to save on interest, a shorter loan term will be a better option.

Think about your financial situation and your budget before you apply for a mortgage, so you can choose the right loan type for your goals.

You may still have a few questions about 30-year mortgages. Here are answers to some common queries concerning 30-year fixed-rate mortgages.

Is a 30-year fixed mortgage really paid off in 30 years?

If you follow your repayment schedule, you’ll pay off your 30-year fixed-rate mortgage in 30 years. However, many homeowners have the option to pay it off early.

What happens if I pay off a 30-year fixed mortgage early?

Paying off your mortgage early can help you save money, perhaps even thousands of dollars in interest. However, paying ahead of time may not work for you if you have other high-interest debt or your lender charges prepayment penalties.

How does interest work on a 30-year mortgage?

The interest you pay on a 30-year mortgage will largely depend on your loan type. A fixed-rate loan will apply the same rate throughout the loan term, but the interest rate on an adjustable-rate mortgage will change periodically.

Is a 30-year mortgage better than a 15-year mortgage?

Both 30-year mortgages and 15-year mortgages have the potential to work well, but the “better” choice depends on your finances. A 15-year loan will have a higher payment each month, but it comes with a lower interest rate – saving you money in time.

A 30-year fixed-rate mortgage has its benefits and disadvantages. While you have lower monthly payments and repayment flexibility, you’ll pay extra in the end because you’ll pay more in interest the longer your loan’s term. However, the smaller monthly payments may free up cash you can use to pay down other debts, build your savings or cover regular expenses so you’re not as stressed about your budget.

Since a 30-year fixed-rate loan doesn’t work for every homeowner, it’s wise to explore your mortgage options before committing to a new home loan.

If you’re ready to find the right loan for your needs, apply online with Rocket Mortgage.