Pros and Cons of the 30-year fixed-rate mortgage

Pros and Cons of the 30-year fixed-rate mortgage

Pros of the 30-year fixed-rate mortgage            Cons of the 30-year fixed-rate mortgage

Promotes home ownership and increases affordability, especially at lower interest rates


Interest rate spikes create a disparity between a bank's long term assets at fixed rates and its deposits/short term liabilities at variable rates

Negative interest rate spreads increase the potential for bank failures, saddling taxpayers with losses

Better priced and readily available, even more so with government backing

Lower price and increased availability are dependent on government backing, creating a mortgage market that depends on government assurances

Transfers risks away from homeowners; the market and banks bear the risk, with banks being sophisticated enough to calculate and assume these risks

Short-term, adjustable rate mortgages, as opposed to long-term, fixed rate mortgages, allow banks to better manage their risks

Makes it easier to manage homeowner finances when compared to adjustable rate or variable rate mortgages

Creates predictability regarding the interest paid during a loan's lifetime

Loan's extended period causes difficulties in the management of a bank's credit/interest risks

A 360 month mortgage is too long to insulate a home buyer

Increases tax deductible interest because of the 30-year's higher interest rate

Increases wealth by promoting the purchase of real estate

Increases investment monies on account of the lower, monthly mortgage payments

Increases down payments and raises the likelihood of mortgage insurance

Prevents the market from setting loan rates and terms

Results in a higher interest rate and causes a slower equity build-up

Provides investment opportunities through mortgage securitization, thereby increasing capital available for loans and shifting risks to investors

Credit and interest risks fuels banks in securitizing these mortgages, facilitating the risks' removal from bank books

Promotes refinancing activity as borrowers attempt to adjust interest rates via refinancing

Refinancing is one-sided/pro-borrower; banks cannot renegotiate rates when interest rates rise

Allows for payments against principal, thereby shortening the loan and decreasing interest costs

Strategic defaults (borrower walk-aways) provide an exit option unavailable to long-term lenders

Provides US banks with a lending option, leaving them free to accept or reject applicants, to require prepayment penalties, or to offer higher rates

A creature of the US market; generally not available in other countries


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