Why the 30-Year Fixed-Rate Mortgage Is a 'Uniquely American Structure'

True to its name, a 30-year fixed-rate mortgage has a term of 30 years, with an interest rate that remains the same for the life of the loan.

As long as you don't refinance or sell your home, the rate you get at the beginning of your mortgage won't change, said Jacob Channel, chief economist at LendingTree. “You'll have the exact same price, no matter what the broader market does,” Channel said.

In 2022, 89% of homebuyers applied for a 30-year mortgage, according to government data. Analyzed By Homebuyer.com.

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Experts say a 30-year fixed-rate mortgage could exist in the United States because of the country's deep financial markets.

“If we did not have the dominance of fixed-rate mortgages in the U.S. residential mortgage market, we would see a much higher level of stress among existing homeowners,” McBride said.

The secondary market for mortgage-backed securities in the United States is “the whole reason” the 30-year fixed-rate mortgage exists, McBride explained.

About half of all mortgages originated in the United States will end up in the form of mortgage-backed securities and sold to bond investors, he said.

While mortgage-backed securities were at the heart of the financial crisis and Great Recession, Improvements It was done to avoid risks. For example, lenders have consolidated mortgage originations and improved underwriting standards and collateral evaluation, and there are now other guardrails that did not exist more than a decade ago.

Mortgage-backed securities are attractive to investors in the United States and around the world because their government sponsorship makes them safe investments over long periods of time. They also offer fixed payments, said Darrell Fairweather, chief economist at real estate brokerage site Redfin.

The interest rate on a 30-year fixed-rate mortgage closely tracks 10-year Treasuries because “U.S. real estate is almost as good an investment as U.S. Treasuries,” she said.

However, mortgage-backed securities are “only part of the story,” according to Enrique Martinez Garcia, an economic policy adviser at the Federal Reserve Bank of Dallas.

“There are two institutions in the American mortgage market that are very specific to the United States: Fannie Mae and Freddie Mac,” Martinez-Garcia said.

Martinez-Garcia explained that the insurance provided by Fannie and Freddie is essential because lenders are willing to bear the risks associated with interest rate movements.

“In most other countries, [that risk] “It is passed on to families and buyers,” he said.

Even in countries where fixed-rate mortgages are prevalent, they typically span shorter time periods because these countries lack a path to securitization and institutions that bear long-term risks, Martinez-Garcia said.

“This is what many other countries are missing,” he added.

While homebuyers in other countries can usually obtain long-term mortgages or fixed-rate loans, the United States is unusual in combining these features.

In Canada, for example, homeowners may get a 25-year mortgage, but are expected to refinance every five years or so, Channel said.

In the UK, homeowners may take out fixed-rate mortgages, but these loans only extend for up to five years.

“Every few years, you still do something that causes your rate to change,” Channel said.

The difference between fixed and variable mortgage rates is who bears the risk of interest rate fluctuations, Martinez-Garcia said. With fixed-rate loans, financial institutions bear the risks. With variable rate loans, consumers do just that.