The 30-Year Fixed Rate Mortgage

It's the most popular type of mortgage, by far. But is it right for you?

This page:

  • Compares the benefits and disadvantages of a 30-year loan

  • Helps you decide if this type of mortgage is right for you

Over the next few pages, we take a look at 15-year FRMs, standard and hybrid ARMs, and some special mortgages for those with particular financial needs.

The second part of this guide examines the rest of the decisions you'll have to make when choosing your mortgage. Refer to the table of contents if you're looking for specific information.

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

This is the most popular type of home mortgage when interest rates are low. Also when the price of homes is high the 30-year fixed rate mortgage is the most practical option for many home buyers.

Unlike its cousins, the ARM and 15-year FRM, a 30-year FRM provides both the security of stable monthly payments and the financial flexibility of increased purchasing power. Hence its popularity.

But the 30-year FRM is really best for home buyers in the market for a moderate-to-expensive home who plan on staying put for a while.

Here's why:

The advantages of a 30-year fixed rate mortgage

The big advantage here is purchasing power. Back in the day, 15-year home loans were the norm. But the cost of owning a home has risen, faster than most people's earning power has. A lot of home buyers just couldn't afford the big monthly payments on a 15 year loan.

Enter the 30-year FRM. Now that principal is spread out over a much longer time frame, and purchasing power rises.

And with a fixed rate, you're guaranteed the same size monthly payments for the life of the loan. When rates are relatively low, like now, this can be a real blessing.

So what's not to love?

The disadvantages of the 30-year fixed home loan

Unfortunately, home equity is built slowly in a 30-year mortgage, because most of the first few years of payments go toward interest. And this also means that the total interest bill on a 30-year plan is much higher than a similar mortgage with a 15-year amortization.

And the initial payments on a 30-year FRM are larger than those on a similar ARM, which decreases purchasing power and increases the interest bill.

This is why home buyers who will probably move again soon might be better off with an ARM - (we talk about this later.)

The silver lining to these drawbacks is a larger mortgage-interest tax deduction and the chance to increase returns through investing.

Confused? Well, even though a 30-year FRM-holder is paying a lot more in interest every month than her neighbor with a 15-year loan, that loss can be recouped through the usually higher returns of the market. The home buyer who invests the monthly payment difference between a 15 and 30-year mortgage has a very good chance of having returns that exceed the difference in total interest.

(The most important thing to remember here is that to save on a 30-year mortgage you really do have to invest the savings. If, realistically, you won't invest - you won't save either.)

The ideal 30-year mortgagee

So, overall, a 30-year FRM is ideal for home buyers who plan to stay in their home for a while (at least five years) and for whom stability and small monthly payments outweigh the importance of total cost.

The 30-year plan also makes a lot of sense if you can and will invest your monthly savings elsewhere. When rates are low, it's a very affordable mortgage option with a lot of purchasing power.

Not sure if that's you? Keep reading, we've got a couple more mortgage types to go.


Next: A look at 15-year fixed rate mortgages.

Get a little financial lesson every week:

Saving on taxes is a year-long process. Start learning how to save year-round by reading our weekly personal finance newsletter, with articles, tips, blog posts, and great deals that will save you money.

Subscribe here: