How the "30-Year Fixed Mortgage" Shaped U.S. Homeownership?

When it comes to mortgages, most Americans prefer 30-year fixed-rate mortgages because they may not realize how rare this type of mortgage is.

A distinctly American phenomenon,  a 30-year fixed-rate mortgage allows you to pay off your loan in 30 years with an interest rate that remains fixed throughout the loan tenure.

The rate you get at the onset of your mortgage remains unchanged as long as you don't refinance or sell your home. Additionally, you could get the same interest rate irrespective of the market conditions.

 | A Quick Fact:  89% of homebuyers applied for a government-backed 30-year mortgage in the San Francisco metro area last year. |

According to experts, the 30-year fixed-rate mortgage is possible in the U.S. because of the country's robust financial markets. Without the widespread availability of fixed-rate mortgages, homeowners in the U.S. would likely experience much higher levels of financial stress.

 

Why the 30-Year Fixed-Rate Mortgage Became America's Favorite Home Loan?

The secondary market for mortgage-backed securities in the U.S. is the primary reason for the existence of the 30-year fixed-rate mortgage. Around half of all mortgages originated in the U.S. are eventually packaged into mortgage-backed securities and sold to bond investors.

While mortgage-backed securities were central to the financial crisis and Great Recession, changes have been made to reduce that risk. The mortgage market has seen significant process improvements, as lenders have reinforced their origination processes and enhanced underwriting standards and collateral evaluation, with new safeguards now in place that were absent over a decade ago.

These securities are attractive to both domestic and international investors for long-term holding periods due to their government sponsorship, which implies a level of government backing, and their ability to offer a fixed payout. They closely track the performance of 10-year Treasuries because U.S. real estate is considered nearly as secure an investment as U.S. Treasury bonds.

However, mortgage-backed securities represent only part of the story. There are unique elements in the U.S. mortgage market, particularly institutions like Fannie Mae and Freddie Mac. The insurance provided by these institutions is crucial to why lenders are willing to take on the risk associated with interest rate fluctuations. In most other countries, that risk is typically transferred to households or buyers.

Even in countries where fixed-rate mortgages are common, they generally cover shorter time frames. This is due to the absence of both a securitization pathway and institutions willing to assume long-term risk, which are factors missing in many other nations.

 

Foreign Homeowners Prefer Flexible Rate Mortgages

Most homebuyers worldwide have easy access to long-term or fixed-rate financing, while few U.S. buyers can assemble them.

For instance, homeowners in Canada may have a mortgage with a 25-year term, but they are required to refinance around every five years.

Homeowners in the U.K. are permitted to take out fixed-rate mortgages, but only for up to five years.

Even if it's not frequent, something every few years will cause your rate to change

Fixed-rate mortgages and variable mortgage rates differ in who assumes the interest risk. Financial institutions bear the risk with fixed-rate loans. Consumers have to deal with the risks of variable-rate loans.

 

Conclusion

A 30-year fixed-rate mortgage can help you turn your dreams of homeownership into reality without any financial burden. Its stability and predictable payments make it a popular choice for many buyers. If you’re considering this option, Total Mortgage can guide you through the process with personalized service and competitive rates. Contact us today to learn more about how a 30-year fixed-rate mortgage can work for you.