What Is a 30-Year Fixed Mortgage and How Does It Work?

Learn how 30-year fixed mortgages work, including pros and cons, in our guide.

If you want to buy a home, you are most likely going to need a mortgage loan. As you research your options, you'll find that the 30-year fixed mortgage is the most popular way to finance a home.

What is a 30-year fixed mortgage? A 30-year fixed-rate mortgage is a loan that allows you to pay off your loan over three decades. It provides a good balance between affordable monthly payments and reasonable interest costs over time. It also offers the certainty of knowing exactly how much your housing payment will cost for the life of the loan.

This guide will explain what a 30-year mortgage is, why you may want this kind of mortgage loan when you buy a home, and what to expect if you borrow.

What Is a 30-Year Fixed-Rate Mortgage?

A 30-year fixed-rate mortgage is a loan you use to buy a home that you pay off over 30 years. Your mortgage rate is fixed for the life of the loan and never changes. Your payment is based on the amount it will take to pay off principal and interest during your loan term. You'll have lower monthly payments than alternatives like a 15-year loan, but higher total interest costs over time.

How Does a 30-Year Fixed Mortgage Work?

A 30-year fixed-rate mortgage allows you to finance a home over 30 years with monthly payments that never change (principal and interest). Fixed-rate loans are an alternative to adjustable-rate mortgages (ARMs), which have rates tied to a financial index and that change over time.

Predictability is a key difference between adjustable-rate vs. fixed-rate mortgages. With a 30-year fixed-rate mortgage, your rate is determined based on financial credentials and market conditions when you apply. It's guaranteed for decades. Your principal and interest payment never changes and is based on how much you must pay to get your balance to $0 by the end of your loan term.

A 30-year mortgage offers affordable payments because of the long payment timeline. While you pay more interest over time with 30-year mortgages than if you chose a 15-year mortgage, since you are in debt for longer, payments are much lower. As a result, these loans are more affordable for most homebuyers.

30-Year Fixed Loan Key Features

When you buy a home using a 30-year mortgage, you make a payment each month for three decades until your loan is paid in full. That's a total of 360 payments. Your monthly payment is made up of:

• Principal and interest: Interest is the amount you pay to borrow. The principal is the balance due. Your monthly payment must cover interest and also reduce your principal over time. The more you borrow and the higher your rate, the more expensive your mortgage will be each month and over time.
• Mortgage insurance: Mortgage insurance is sometimes required as part of your monthly mortgage payment. What is mortgage insurance? It's insurance you're required to buy to protect lenders from losses if you default (don't pay your debt). Mortgage insurance is usually required on conventional loans if you make a down payment under 20%, as well as on FHA loans.
• Escrow: Many mortgage lenders require you to pay into an escrow account to cover the costs of property taxes and insurance. For example, if your homeowner's insurance costs $1,200 per year, you'd have to put $100 per month into escrow. This money is added to your mortgage payment and kept safe until it's time to pay the bills.

Your principal and interest payments never change with a 30-year fixed-rate loan. Other costs may. With a conventional loan, for example, you can eliminate mortgage insurance as you build equity. Your escrow payments will also increase if property taxes or insurance costs rise. Understanding this is key to knowing how does a 30-year mortgage work.

30-Year Fixed-Rate Mortgage Example

It's helpful to see what a 30-year mortgage actually looks like when answering the question, what is a 30-year fixed mortgage?

Say you bought a $400,000 house with a 10% down payment and a 30-year fixed-rate mortgage at 6.75%. Here's what the finances of this could look like. You'd pay:

• $2,335 per month to principal and interest (this part of your payment goes toward paying down your loan and covering the cost of borrowing)
• Approximately $177 for private mortgage insurance (depending on credit) because your down payment is less than 20%
• $300 for property taxes, assuming a 1.2% tax rate
• Estimated $79 for homeowner's insurance depending on area of home and credit score

In total, monthly costs would equal $2,714 for your home loan.

30-Year Fixed Mortgage Rates

When you take out a home loan, you obviously want the lowest rate possible. However, many factors affect your rate -- some of which you can control, and others that you cannot.

Here are the key factors that determine what rate you'll pay for your 30-year loan.

• Type of loan: Conventional loans (those not backed by the government) may come with fewer up-front fees and lower rates, but can be harder to qualify for.
• Credit score: Lenders consider your credit score to determine if you've been a responsible borrower. The higher your score, the more lenders will approve you and the better your rate. On the flip side, a low score could make it harder to get an affordable loan.
• Income: Income affects your debt-to-income ratio (what you owe relative to what you earn). A lower DTI ratio can result in better rates since it's less risky for lenders to give you a loan that your income can easily cover.
• Economic conditions: Economic factors outside your control, including 10-year treasury bond yields and the Federal Reserve's decisions on interest rates, can affect how much lenders charge you to borrow.

A 30-year fixed-rate loan will often have higher rates than a 15-year loan because longer loans are riskier to lenders. It's also common for 30-year loans to have higher rates than an ARM, since it is riskier for lenders to give you a guaranteed rate for three decades.

This does not mean 30-year loans are the wrong choice, even if there are cheaper loans out there. The predictability and affordability of a 30-year fixed-rate loan can be worth paying a little more for.

Pros and Cons of 30-Year Fixed Mortgages

There are both benefits and disadvantages of 30-year loans. This isn't a surprise, as there are always tradeoffs when making financial choices. Here are some of the different pros and cons of 30-year fixed mortgages.

How to Get a 30-Year Fixed Mortgage

If you are interested in using a 30-year fixed-rate mortgage to buy a house, here are the steps you should take to get this loan:

1. Review your credit to make sure there are no red flags, such as uncorrected errors that reduced your score
2. Gather documents such as pay stubs, tax returns, and bank statements that you will need to apply for your loan
3. Visit several lender websites to see their rates on 30-year fixed-rate loans
4. Get pre-qualified or pre-approved, both of which require providing some financial details to the lender to find out how much you can borrow and at what rate
5. Find a home you like and get an offer accepted
6. Get final loan approval from your lender
7. Sign your documents and close on your home and your loan

Once you've completed this process, you should be a homeowner with a predictable, steady mortgage loan you can repay over time.

30-Year Fixed-Rate Mortgage FAQs

Still need to know more about what is a 30-year fixed loan? Here are the answers to some frequently asked questions about 30-year fixed-rate mortgages.

Is a 15-Year or 30-Year Fixed-Rate Mortgage Better?

A 30-year fixed-rate mortgage is better if you want a more affordable loan and you want more flexibility in your budget. A 15-year fixed-rate mortgage is better if you want to pay less interest over time, but are OK with committing to much higher monthly payments during your loan's repayment period. Carefully compare 15-year vs. 30-year mortgages to find the right one for you.

Can I Pay Off My 30-Year Fixed Mortgage Early?

You can pay off your mortgage whenever you want to. Most mortgages do not have prepayment penalties. Paying off your mortgage ahead of schedule will help you save on interest.

Final Thoughts: Is a 30-Year Fixed Mortgage Right for Me?

A 30-year mortgage can be an excellent financing option. If you want an affordable loan that provides stability and predictability for years to come, this is the loan for you.

If you're ready to buy and want to explore your options for 30-year fixed-rate loans, start the loan process with Freedom Mortgage today.