Longer mortgages could make housing more affordable. Why is 30 years the standard?
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Longer mortgages could make housing more affordable. Why is 30 years the standard?
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Listener Barry Allen from Athens, Georgia, asks:
Why is the standard home loan 30 years? Wouldn’t it be more affordable to have longer terms?
Most Americans will spend several decades paying off their mortgage.
Thirty-year fixed is the standard, although some borrowers can take on 10- or 15-year loans, which would help them save on interest.
That’s the tradeoff you get with any loan, whether you’re taking on home, auto or student debt: Longer-term loans are more expensive overall, but you have a lower monthly payment. If you have a 30-year $350,000 home loan at a 6.6% interest rate, your monthly payment would be about $2,235, according to LendingTree. You’d have to pay about $700 more each month on a 15-year mortgage with a 5.9% interest rate.
Over the past century, a global economic crisis and government regulations turned the 30-year mortgage into the country’s benchmark. On top of that, 30 years gives homebuyers plenty of breathing room.
“It provides a pretty good blend of affordability as well as a reasonable payoff time. You don’t necessarily have to worry about paying it off too quickly, but you’re also probably not going to be saddled with a mortgage until you die of old age,” said Jacob Channel, senior economist for LendingTree.
Mortgage terms were much shorter a century ago. Borrowers could pay off their house in as little as three years, Johns Hopkins University history professor Louis Hyman told Marketplace in 2018.
If you couldn’t afford the principal in a few years, you could borrow for another three to five years.
But banks didn’t have money to lend after the Great Depression. As part of the New Deal, Congress created the Home Owners’ Loan Corporation in 1933 to buy failing mortgages and turn them into longer-term loans.
The Federal Housing Administration insured mortgages against default, and set new standards for those loans, leading to the 15-year mortgage.
“Then basically the FHA kind of keeps pushing it to 20 years, and then 25, and then 30,” University of Utah finance professor Andra Ghent told Marketplace in 2018.
When interest rates rose in the 1960, a 30-year fixed mortgage became more appealing to homebuyers over the then-standard 15-year term, Channel said. Then in the 1970s, lending became less risky after Congress allowed Fannie Mae and Freddie Mac to buy mortgages from lenders.
“Basically how the mortgage industry works in the United States is that when you get a mortgage from a lender, that lender usually doesn’t keep it. Instead, they turn around and sell it,” Channel said. “And if it’s called a conforming loan, they can sell it to Fannie Mae or Freddie Mac. That means they get cash faster. They don’t have to wait 30 years for you to pay off your loan.”
Mortgages above 30 years are not considered conforming loans, which means lenders can’t sell them to Freddie or Fannie.
However, you may be able to modify your loan and extend the term to 40 years if you’re struggling to pay it off. The eligibility requirements will vary depending on your loan. If you have a loan that’s owned by Freddie or Fannie, you have to be at least 60 days behind payment or demonstrate you will be within the next 90 days.
Some lenders might offer a long mortgage right off the bat, but Channel said these loans are much riskier.
Borrowers aren’t building equity as quickly with longer-term loans since they’re paying less each month, said Arthur Acolin, an associate professor of real estate at the University of Washington.
Having greater home equity can make it easier to refinance your mortgage and get a home equity line of credit.
Thirty-year mortgages have notably higher interest rates than 15-year mortgages, which means a 40-year mortgage would likely come with even more interest, Channel said.
Say you have a 6.5% interest rate on a 30-year, $350,000 loan. Your total interest over that loan’s lifetime will be about $450,000. Even if the interest rate on a 40-year loan were the same, you’d end up having to pay about $630,000 in total interest.
“You’re going to end up spending potentially hundreds of thousands of dollars more in interest over your loan’s lifetime,” Channel said.
In the future, people might push for 40-year mortgages if home prices remain high and many continue to struggle to afford a home, Channel said. The national median price of an existing home reached a record $426,900 in June. But instead of changing loan terms, building more housing would help lower prices.
“I think in the long run, that’ll probably be healthier. I think that there is a genuine concern that Americans already have a ton of debt,” Channel said. In 2023, household debt surpassed $17 trillion for the first time ever.
Mortgage lenders tout homeownership as a way to build wealth. If your home’s price goes up, your investment will grow in value. But if home prices are too high, that can shut out prospective homebuyers.
“As a country, we have sort of an inherently contradictory view of housing,” Channel said. “On one hand, people say housing is a basic necessity and it should be affordable. On the other hand, we say housing is an investment that should appreciate in value, and those two things don’t really work together.”
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