What Is a 30-Year Fixed Mortgage and How Can I Qualify?

Nearly 90% of homeowners today take advantage of a 30-year fixed-rate mortgage when buying their home. While this loan term can make homebuying more accessible and affordable, it can also cost you more in interest when compared with a mortgage with a shorter term. 

Here’s a look at how 30-year mortgages work, how much they cost, what you’ll need to qualify, and how to decide if a three-decade repayment term is right for you over the long term.

A 30-year mortgage is a home mortgage loan with a 30-year repayment schedule, used to purchase an approved real estate asset such as a single-family home, townhouse or condo. Most of these loans have a 30-year fixed mortgage rate, meaning that you will have a full three decades to repay your home loan with an interest rate and mortgage payment that won’t change. 

There are four primary components to any 30-year mortgage loan, each of which will impact how much you pay monthly and over the course of your loan. These key factors include your:

• Loan principal: The amount of money borrowed at the beginning of the loan that must be paid back.
• Mortgage interest rate: The percentage of interest charged on the home loan.
• Loan term: The amount of time it takes to fully pay off your loan.
• Monthly payment breakdown: The principal, interest, taxes and insurance (PITI) that comprise your monthly mortgage payment. 

Your loan principal is the amount you borrow to finance your home purchase. Depending on your lender, creditworthiness, and the type of mortgage loan you get, the principal amount could be the entire purchase price of your home or just a portion of it.

For example, if you buy a $500,000 home with an $80,000 down payment, you would borrow (and subsequently need to repay) a principal balance of $420,000. 

The interest rate on your mortgage loan determines how much your lender earns in exchange for lending you the money. This rate also factors into your loan’s annual percentage rate (APR), which is the total amount your loan will cost you each year when all interest charges and fees are accounted for. Most 30-year loans have a fixed interest rate that never changes, so you don’t have to worry about rate increases over time. While 30-year adjustable-rate mortgages (ARMs) exist, they are less common. 

Your home loan’s interest rate is determined by several unique factors, including your:

• Credit history and credit score
• Down payment amount
• Mortgage loan type
• Principal loan amount
• Current benchmark/market rates (set by the Federal Reserve)
• Mortgage loan term
• Purchased loan points

Generally, the better your credit score and the larger your down payment, the lower your interest rate will be. However, this is nuanced and depends on the specifics of your purchase and the lender you choose. 
You can purchase mortgage discount points from many lenders. These are a one-time, upfront fee of around 1% of your loan amount. Each point you buy typically reduces your interest rate by 0.25%. So on that same $420,000 home loan, you could reduce your interest rate a full 0.50% by purchasing two mortgage points for around $8,400 ($4,200 x 2).  

Your loan’s repayment term is how long you’re given to repay what you borrowed. With a 30-year fixed-rate mortgage loan, your repayment is, well, 30 years. And while a 30-year mortgage is the most popular type of home loan, it isn’t the only option.

The shorter your loan term, the higher your monthly payments will be for the same loan amount. While you may be able to lock in better rates and pay less interest overall with a 15-year or 20-year loan, you’ll also have a higher monthly payment. By spreading your mortgage over 30 years, you’ll have the lowest monthly payment amount but will likely pay more in total interest.

Your monthly mortgage payment includes both principal and interest payments on your loan. This amount is amortized, meaning that while your actual payment amount stays the same over the life of the loan, the portion of that payment that goes toward your principal balance versus interest to your lender changes inversely.

For example, your very first mortgage loan payment in month one is almost entirely interest. If you have a $2,500 payment, you might be paying $2,350 in interest while $150 goes toward paying down your principal. In month two, you might pay $2,346 in interest and $154 in principal. By the end of your 30-year term, that $2,500 payment might look the exact opposite of month one, with nearly all going toward principal and only a small amount in interest.

If you choose to utilize escrow, your monthly payment will include a portion of your property taxes and/or homeowners insurance premiums. Your lender can collect and hold these funds in a dedicated escrow account, then make payments toward your local tax assessor-collector and homeowners insurance carrier on your behalf as required.

When your monthly payment includes all four of these components, it’s referred to as PITI (principal, interest, taxes, insurance). 

A 30-year mortgage loan is considered a higher risk for lenders since you only pay a small portion of the principal balance each month and it will take a long time to repay the debt. For this reason, you may find that these loans have higher interest rates and more stringent eligibility requirements than a 15-year mortgage or similar.

Your credit score is one of the most important factors when qualifying for a mortgage loan and snagging a competitive interest rate. The better your score, the more favorable you can expect your available mortgage loan terms to be.

A credit score is calculated using the data in your credit report(s), which are held by the three credit bureaus: Experian, Equifax and TransUnion. Your credit history includes open lines of credit, payment history, credit utilization (how much of the available credit line you’re using), the types of accounts you own, and how long you’ve been using credit. 

There are multiple credit scoring models, each with its own score range. One of the most commonly used is the FICO Score 8, which ranges from 300 to 850. With the Fico 8, a very good score is anything over 740, which will likely qualify you for a new loan and unlock competitive interest rates and loan terms. 

If you’re not sure where your credit stands, you can request a free report from each of the three bureaus once per year. You can visit annualcreditreport.com, which is the official government-approved website to request your reports.

Your debt-to-income ratio, or DTI, is a calculation that shows how much you pay on existing debt compared with how much you earn. This calculation is important to lenders, as it doesn’t matter how much you earn if a large percentage of that income is already spoken for by other creditors. 

To calculate DTI, add up all of your monthly debt payments and divide that total by your gross monthly income. So, if you earn $5,000 per month but have a $550 car payment, a $730 personal loan payment, and a $385 credit card bill, your DTI is just over 33%. 

While each mortgage lender will have its own DTI threshold (which may also be influenced by the type of mortgage you’re requesting), most view 36% as favorable and many require a DTI that’s less than 45%. 

If your DTI is holding you back from lender approval, you must take steps to improve it. You should avoid taking on any new debt and take steps to pay down the debts that you owe. Look for ways to boost your income and work to consolidate and refinance your existing debts at a lower interest rate. These steps will help reduce your monthly debt and improve your DTI.

Most mortgage loans require a down payment, which is the portion of your home purchase that you cover upfront in cash before financing the remainder. While many of us grew up hearing that a 20% down payment was necessary to buy a home, this isn’t the case.

Your minimum down payment depends on your credit score, lender, and even the type of loan you’re requesting. Generally, down payments may be as low as:

• 3% for a conventional loan
• 3.5% for an FHA loan
• 0% for a VA loan
• 0% for a USDA loan

That said, the larger your down payment, the less risk you’re asking your mortgage lender to take on. In exchange, a large down payment may unlock a lower interest rate or more competitive loan terms. If you don’t have a credit score that is high enough, your down payment requirement may also be higher than the minimum offered by the lender and loan type. 
A larger down payment will also help you avoid private mortgage insurance (PMI), which is a mandatory coverage added to loans with less than 20% in home equity. PMI is designed to protect your lender if you default on your mortgage loan and can cost you around $30 to $70 per month for each $100,000 financed.

A 30-year mortgage is the home loan of choice for most Americans, so the odds are high that it might be a good fit for you. However, it’s important to look at your personal needs and the pros and cons of each mortgage type before making your final choice. 

By taking out a 30-year loan term, you’ll have the lowest possible monthly payment. However, this loan also results in the highest total amount of interest paid by most borrowers. Some 30-year mortgages allow for prepayment without penalty, which lets you pay off your mortgage loan faster than scheduled with lump contributions or increased monthly payments. That way, you can save money on interest and potentially pay off your loan faster but still have the flexibility of a 30-year term.

You’ll also want to consider your savings and how much of a down payment you can afford. While conventional lenders may allow for as low as 3%, you’ll likely pay PMI and have a higher interest rate. If you qualify for a 0% down payment mortgage like a VA loan, this might be a better option to keep your savings and avoid added fees.