Is the 30-Year Mortgage Best?

Most home buyers go with a 30-year mortgage. There are other options — most notably the 15-year mortgage. The shorter mortgage typically comes with a lower interest rate. But it also means higher monthly payments.

The monthly weight of a 30-year mortgage is easier to handle. This, in turn, makes homeownership an easier reach for more people. Even well-off buyers like the 30-year loan. It allows them to buy better homes.

It might not appeal to everyone. But there’s much to be said for the 30-year mortgage. Let’s take a look.

The Backstory: How We Got Our 30-Year Loans

A century ago, most people paid off their mortgages within five to seven years. Nice, but it meant putting half the home price down at the start. And it forced a borrower to come up with a large, lump-sum payoff in that very brief span of years.

The infamous 1929 stock market crash led to an avalanche of loan defaults and foreclosures. To deal with the mess, the Federal Housing Administration (FHA) came into being in 1936. It created refinancing opportunities for borrowers. It made sure the bankers were covered by mortgage insurance.

In the years to follow, Fannie Mae and Freddie Mac were established. New options became available for hopeful home buyers. Lenders experimented with loan terms long enough to work for ordinary working people.

According to David Insley for the Guaranteed Rate Affinity® mortgage firm:

While the FHA cleared the way for its eventual arrival, the 30-year mortgage wasn’t officially authorized by Congress until 1948 (for new construction) and 1954 (for existing homes).

In the years since, the 30-year mortgage has won out with most home buyers. The main reason? A pressing need for manageable monthly payments.

The 30-Year Mortgage: A Simple, Flexible Tool

The standard, 30-year fixed mortgage comes with manageable monthly payments. For first-time home buyers especially, lower payments put deeds within reach. So, a 30-year mortgage eases the journey from renting to owning for many hopeful buyers. These buyers may have more money later in their working lives, and they can plan to resolve their mortgage debts then.

Plus, flexibility is worth something. Consider the deed holder with a 30-year mortgage. This borrower can make voluntary extra payments at any time. In this way, borrowers have the power to shorten the term of the loan themselves, just by adding to their monthly auto-pay amount on the mortgage company’s website. They can designate the early payments to the loan principal — cutting down the amount that they need to pay interest on.

Interest is always based on the principal that’s left to be paid. So, making “prepayments” cuts down the interest paid during the course of the mortgage. So far, so good.

Now, say the borrower runs into some financial stress. At that point, the borrower can save money by removing the extra amount, and only paying what’s due.

This is how a 30-year home loan offers financial options to the borrower. The loan’s flexibility acts a little like insurance against unforeseen setbacks.

If you’re in the financial position to do so, you can pay off a 30-year mortgage in 20 years, 15 years, 10 years… even one year. If your situation changes, you can go back to steadily making just the minimum monthly payment. 

Important note: While today’s 30-year loans rarely penalize borrowers for paying early, you may still have to make agreed-upon interest payments. Speak with your loan servicer for clarity in your own case.

A Tried-and-True Inflation Buffer

Rents go up in inflationary times. Even in normal times, inflation happens at a rate of around 2% annually.

A fixed-rate mortgage, though, doesn’t rise with inflation.

For thirty years, the fixed rate you got at the outset is the rate you can keep. There’s value in that kind of budget certainty. Some people are comfortable keeping their mortgage for as long as they keep the home, and think of their monthly payments as rent that can’t be jacked up. All the while, they can claim deductions for the interest on their tax returns.

And if interest rates happen to go down significantly enough to matter, the borrower can refinance.

A note about longer mortgages: There is such a thing as a 40-year home loan. Such mortgages are non-qualified (non-QM) mortgages. That is, they exist outside the standard regulatory framework. Their purpose is to bring struggling borrowers out of default by spreading the payments over extra years.

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The Investor’s Go-To Loan

The famous investor Warren Buffet called the 30-year mortgage “the best instrument in the world” on account of the homebuyer’s ability to refinance it — and, meanwhile, to invest in stocks. This highlights the strategy of maximizing the value a homeowner can accumulate — rather than focusing on paying as little as possible to the lender.  

The manageable monthly cost of a mortgage leaves, for some, more to invest in a 401(k) or retirement fund. Yes, you’ll pay more in interest overall with the 30-year loan, but well-placed investments can more than compensate. As long as the investments perform well, this strategy can indeed make up for the larger sum of mortgage interest paid over a longer term of years.

When buyers come into the market during times of elevated mortgage rates, some might decide to get the 30-year mortgage and then go ahead and make extra payments to shorten their loans. (Granted, some might choose a 10- or 15- year loan that can come with relatively attractive rates in high-rate times.)  

But for those who have relatively low-interest mortgages — as most deed holders do today — it’s possible to get enough profits from investment funds to use the loan as part of a wealth-building strategy.

Of course, there are no guarantees in the stock market (or other investment opportunities). This is a calculated risk the homeowner takes. And many do.

It’s the Most Popular Mortgage Term. Is It Right for You?

A shorter mortgage means a faster final payoff. And interest rates on 15-year mortgages definitely beat the ones you see on longer loans. That difference can easily add up to five-figure interest savings over the course of a mortgage. But again, most potential buyers are seeking affordability, just to get a deed at all.

The 30-year mortgage offers lower monthly charges and an appealing set of financial options. Speak with a mortgage consultant to help work out what fits your situation. Even experienced buyers benefit from professional, individualized guidance. Which leads us to a critical note for readers: Deeds.com is not a financial adviser. We offer this article to orient readers on the path to their own due diligence, and not as financial advice.