Even though the 15-year fixed-rate mortgage was just 2.5 percent last year, the lowest in recorded history, and three-quarters of a percentage point below the 30-year fixed-rate loan, more than 85 percent of the home loan market was dominated by 30-year fixed-rate mortgages.
The 30-year fixed-rate mortgage has been popular particularly in recent times after the housing bubble and crash, said Lawrence Yun, chief economist with the National Association of Realtors.
Yun said consumers want certainty, and by getting a 30-year fixed rate mortgage while they are in their homes is protection against the uncertainty of other economic factors.
As for the second reason, stability, a fixed interest rate over 30 years also means a monthly principal and interest payment that is predictable to homeowners.
“Moreover, by avoiding payment shock and negative amortization, fixed-rate borrowers are less likely to fall behind on their payments, – a plus for investors too,” Nothaft writes.
Why not a longer period than 30 years?
Yun says institutions and homeowners rely on the 30-year fixed-rate mortgage for both tradition and history.
Also, “People view more than 30 years as lifetime of payments,” Yun said. “Thirty years offers a term limit to say, ‘At a certain point in my life, I will not have to pay a mortgage.’ I think that assurance is comforting.”
Yun adds that given the mortgage’s standardization and popularity, it makes it easy for Wall Street, or Fannie and Freddie to guarantee those mortgages.
Nothaft said 30-year fixed-rate loan is flexible because it is generally prepayable at any time without penalty.
If homebuyers choose to pay off the loan before maturity, in the case of refinancing or selling the home, for example, they can do so without paying an early prepayment fee, Nothaft said.