Why the 30-year fixed-rate mortgage is a “uniquely American structure”

Most U.S. home buyers who take out a mortgage choose the 30-year fixed rate option, but they may not realize how unusual that offer is.

“The 30-year fixed-rate mortgage is a uniquely American structure,” said Greg McBride, chief financial analyst at Bankrate.

As the name suggests, a 30-year fixed-rate mortgage spreads the repayment period over 30 years, and the interest rate remains the same over the life of the loan.

Jacob Channell, senior economist at LendingTree, said the interest rate at the start of your mortgage won’t change unless you refinance or sell your home. “The exact same rates apply regardless of broader market trends,” Channell said.

According to government data analyzed by Homebuyer.com, 89% of homebuyers applied for a 30-year mortgage in 2022.

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Experts say 30-year fixed-rate mortgages are possible in the United States because of the rich financial markets.

“Without the dominance of fixed-rate mortgages in the U.S. mortgage market, stress levels for existing homeowners would be even higher,” McBride said.

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

About half of the mortgages originated in the U.S. end up being packaged into mortgage-backed securities and sold to debt investors, he said.

Mortgage-backed securities were at the center of the financial crisis and Great Recession, but improvements have been made to hedge the risks. For example, lenders have strengthened their mortgage origination processes, improved underwriting standards and collateral evaluations, and other guardrails now exist 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 government support provides a safe investment over the long term. They also offer fixed dividends, said Darryl Fairweather, chief economist at real estate brokerage site Redfin.

He said that because “U.S. real estate is almost as good an investment as U.S. Treasuries,” interest rates on 30-year fixed-rate mortgages are similar to 10-year U.S. Treasuries.

But Enrique Martínez García, an economic policy adviser at the Dallas Fed, said mortgage-backed securities are “only part of the picture.”

“There are two institutions in the U.S. mortgage market that are very focused on the U.S.: Fannie Mae and Freddie Mac,” Martinez-Garcia said.

The insurance provided by Fannie and Freddie is essential to why lenders are willing to take on the risks associated with interest rate fluctuations, Martinez-Garcia explained.

“In most other countries, [that risk] gets passed on to the households who are the buyers,” he said.

Even in countries where fixed-rate mortgages are common, their terms are usually short-term. Martínez García said this is because such countries lack a path to securitization and the institutions to take on long-term risks.

“That’s something that many other countries lack,” he said.

While homebuyers in other countries typically have access to long-term mortgages or fixed-rate loans, these combinations of attributes are rare in the United States.

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

In the UK, homeowners may have access to fixed-rate mortgages, but such loans only last for a maximum of five years.

“Yet, every few years, you’re doing something where the rates change,” Channel said.

Martinez-Garcia said the difference between fixed-rate and variable-rate mortgages lies in who bears the risk of interest rate fluctuations. With fixed interest rates, the financial institution bears the risk. For variable-rate loans, consumers do so.