“Affordability, flexibility and stability.”
If you’re planning on buying a home—an investment that may be one of the most significant of your life—these terms sound pretty good, right?
The above are the three reasons, according to Freddie Mac chief economist Frank Nothaft, that a large majority of Americans opt for 30-year fixed-rate mortgages. The reliable option dominates the home-loan market, with more than 85% of mortgages falling into this category last year, ABC reports.
Why It’s So Popular
Since the loan term is so long, the principal is paid back more slowly—which means lower payments than, for example, a 15-year mortgage. This makes home buying more accessible to young people who aren’t earning as much, Nothaft says. The monthly payment is also predictable, which appeals to many homeowners, as well.
The housing bubble and subsequent crash also boosted the 30-year fixed-rate mortgage’s prevalence, Lawrence Yun, chief economist with the National Association of Realtors, told ABC. The “certainty” of this kind of long-term loan protects consumers against other variable economic factors, he said.
People are also attracted to this type of mortgage because it’s “traditional”—it may be what their parents and grandparents used to buy their homes. Because these mortgages are so standardized, it’s easy for Wall St., Fannie Mae and Freddie Mac to guarantee them.
Why Buyers Should Examine Their Options
Despite its appealing qualities, the 30-year fixed-rate mortgage still ends up costing more in the long run because of the accumulation of interest. People who are able to afford the higher monthly payments for a 15- or 20-year mortgage should consider it.
To illustrate the savings, here’s an example:
A 30-year fixed-rate mortgage of $250,000 at the current interest rate of about 4.5% would mean a monthly payment of about $1,266. The same loan with a 15-year term and an interest rate of 3.6% would bring the monthly payment to about $1,800 a month.
With the 15-year loan, you would pay $73,911 in interest over the life of the loan, compared to a (relatively) outrageous $206,016 in interest with the 30-year loan. So it’s certainly worth examining your budget to see if you can make room for a larger monthly mortgage payment.