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Comparing Terms of Fixed-Rate Home Loans

10 15 30 40 and 50 Year Mortgages: A Comparison

Across the United States 88% of home buyers finance their purchases with a mortgage. Of those people who finance a purchase, nearly 90% of them opt for a 30-year fixed rate loan.

Loan Type Percent of Borrowers Buying a Home Percent of All Home Buyers
30-year Fixed 90% 79.2%
15-year Fixed 6% 5.28%
Adjustable-rate 2% 1.76%
Other Loan Terms 2% 1.76%
Use Any Type of Financing 100% 88%
Paid Cash in Full N/A 12%

Source: Freddie Mac's 2016 home buyer statistics, published on April 17, 2017

Fixed Versus Adjustable Rate Loans

On a fixed rate mortgage, the interest rate remains the same through the entire term of the loan, rather than the interest rate doing what is called “float” or adjust. What characterizes a fixed rate mortgage is the term of the loan and its interest rate. There are a number of popular fixed-rate mortgage loan terms: the 30-year fixed rate mortgage is the most popular, while the 15-year is next. Other loan terms tend to be quite rare in comparison. People paying off smaller loans may want to try to pay them in 10 years, while people with pristine credit who are afforded credit cheaply could choose to extend their credit out to a 40-year or 50-year term. Those who want to remain highly levered & have other financial assets to back their position may opt for interest-only or balloon mortgages.

In the United States fixed-rate mortgages are the most popular option. In many other countries like Canada, the United Kingdom & Australia adjustable (or variable) rate loans are the standard. If a large portion of the economy is structured into variable rate loans or interest-only payments, then if the housing market gets soft it can create a self-reinforcing vicious cycle where rising interest rates spark further defaults, which then reduces home prices & home equity, driving further credit tightening & defaults..

The above referenced calulator uses rough ranges for interest rates. The following table provides current market information from local lenders.

30 Year Fixed Rate Mortgage

In the United States the traditional home loan is the 30-year fixed rate mortgage. This is the most popular loan for those buying homes for the first time and even those who own more than one home. The 30-year fixed home loan fits more financial situations than any other home loan. This loan program also allows the homebuyer to have low monthly payments while having payment certainty throught the duration of the loan.

Highlights of the 30 year fixed rate mortgage are:

  • If the homebuyer chooses to increase their monthly payments, they can build equity in their home faster.
  • There are usually no pre-payment penalties with a 30-year fixed rate mortgage.
  • The low payments allow the homebuyer to use their extra money for investing and on other expenses.
  • If rates rise the homeowner is protected, but if rates fall the homeowner can refinance into a lower rate loan.

15 Year Fixed Rate Mortgage

A 15-year fixed rate mortgage allows the homebuyer to own their home free and clear in a 15 year period. While the monthly payments are a little higher than a 30-year mortgage, the interest rate on the 15-year mortgage is a little lower. The homebuyer also pays less than half of the total interest of the traditional 30-year mortgage. A 15 year fixed rate mortgage allows younger homebuyers with the income to meet the higher monthly payments to pay off the house before their children enter college. This kind of mortgage allows them to own more of their home faster with this mortgage. Homebuyers who are established in their careers tend to have higher incomes and they desire to own their homes before they retire. These are the types of people who may prefer this kind of mortgage.

Some advantages of the 15-year fixed rate mortgage are:

  • The homebuyer owns their home in half the time it would take them to own it through a traditional mortgage.
  • The homebuyer saves more than half of the amount of interest paid in a 30-year mortgage.
  • Lenders usually offer this type of mortgage at a lower interest rate than the interest rate of a 30-year loan.

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Other, Less Common Loan Terms

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10-Year Fixed Rate Mortgage

A 10-year fixed mortgage has an interest rate that never changes throughout the 10 year loan period. Initially, the principal amount is reduced and then it moves at an accelerated pace throughout the loan period. The 10 year fixed rate mortgage is essential for those individuals with high income who want to pay the least amount of interest for their home as possible, while remaining protected from the risk of rising interest rates. This allows for quick payoff of the mortgage, but as a result they have higher monthly payments. For those who can afford these types of payments, it can be a very smart move since hundreds of thousands of dollars can be saved in interest.

Highlights of a 10 year fixed rate mortgage are:

  • High monthly payments can save the most money in the long-run.
  • Regardless of changes in the market, the rate is fixed for 10 years.
  • For those who have a high enough income, a 10-year fixed rate mortgage can pay off the home in 10 years or less.

25-Year Mortgage

The most common loan term in the United Kingdom is a 25-year loan. Typically their loans are structured as tracker, discount variable or standard variable rate loans which have a 2 to 5 year introductory period where the rate is fixed & then the loan shifts to a floating rate after the initial period.

40-Year Fixed Rate Mortgage

40-year mortgage rates are usually slightly higher than the traditional 30-year fixed mortgage, but the monthly payment tends to be lower due to the extended term. This loan is a good alternative for borrowers who do not desire to have an adjustable rate mortgage but still wants or needs the low monthly payment that only comes with this extended term loan program. Customers pursuing the 40-year home loan are the ones who are looking for one of two things. They are either searching for a lower payment that allows them to afford a more expensive house, or they simply want a lower payment without having to sign up for an adjustable rate mortgage.

Highlights of the 40 year fixed rate mortgage are:

  • The term is fixed for a period of forty years no matter the changes in the market.
  • The potential for a lower monthly payments than with a 30-year fixed home loan.
  • Purchase a larger home than what can be afforded with a traditional 30 year loan.
  • Low payments leave extra money for other expenses, or perhaps to be invested in other markets.

50-Year Fixed Rate Mortgage

The 50-year fixed mortgage loan is quite different in that it is like a 30-yar fixed mortgage with what is called a 50 year amortization period. A 50-year fixed rate mortgage allows the homebuyer to pay a small amount toward the principal in the beginning, which can allow them to stay aggressively invested in other markets.

Highlights of the 50 year fixed rate mortgage are:

  • Payments are based upon a 50 year amortization schedule
  • These loans are good for those with strong credit who have a history of achieving outsized returns investing in their business or speculating in the broader market.
  • The low payments allow the homebuyer to use the extra money for other investments or other important expenses.

The one and very obvious disadvantage that accompanies this loan is that the term is so long. Half of those buying homes for the first time are aged 32 or older, according to research by the National Association of Realtors. If these buyers choose the 50-year mortgages and they never refinance or make extra payments, they will not pay off their home loan until they are well into their 80’s.